The S&P 500 is heading toward its steepest weekly decline since March 2023, with bonds fluctuating as a disappointing U.S. labor report reignited concerns over a cooling economy and questions about whether the Federal Reserve is responding quickly enough to avert further damage.
The S&P 500 fell 1.5%, while the Nasdaq 100 plunged 2.4%, both affected by a weaker-than-expected jobs report. U.S. payrolls came in 23,000 below estimates in August, stoking fears of a slowing economy. Meanwhile, Treasury two-year yields initially dropped 15 basis points before recovering slightly. Despite some speculation earlier in the week, Wall Street’s expectations for a half-point rate cut by the Fed this month lost momentum. This was largely in response to remarks from Fed Governor Christopher Waller, who signaled openness to a larger cut, but not a definitive stance.
“Investors are now fixated on two issues: how aggressive the Fed’s easing cycle will be, and how quickly the economy might slow down,” noted Scott Wren, Senior Global Equity Strategist at Wells Fargo Investment Institute. “We should expect continued volatility in the near term.”
Nonfarm payrolls rose by 142,000 in August, placing the three-month average at its lowest level since mid-2020, according to data from the Bureau of Labor Statistics. The unemployment rate dropped to 4.2%, marking the first decline in five months, driven by a reversal in temporary layoffs.
Though the reaction in stock markets wasn’t as severe as it has been in previous months, the S&P 500 has now suffered back-to-back losses of at least 1.5% on two consecutive jobs reports for the first time since 2012.
Every sector within the S&P 500 retreated, with technology stocks leading the charge downward. A group of megacap stocks, often referred to as the “Magnificent Seven,” shed 3.1%, with Nvidia Corp. falling 4% and Broadcom Inc. plummeting 8% after issuing a downbeat forecast. The Dow Jones Industrial Average slipped 0.8%, while the Russell 2000—tracking smaller companies—lost 1.6%.
On the bond market, 10-year Treasury yields edged down by one basis point to settle at 3.72%, while the dollar remained unstable.
“Recession fears are climbing after this morning’s weaker-than-anticipated jobs report,” said Jose Torres, senior economist at Interactive Brokers. “Investors are now re-evaluating the earnings outlook for 2025, questioning whether those forecasts are too optimistic.”
While the latest labor data wasn’t soft enough to warrant an immediate 50-basis-point rate cut, the focus will shift to next week’s consumer price index (CPI) and wholesale inflation data, which could potentially sway the Fed’s stance.
Torres added: “Although a 50-basis-point reduction isn’t justified by the current data, traders are looking ahead to November, where that size of a cut seems more likely if the economic picture continues to deteriorate.”
Analysis: Opportunities and Risks
For investors, the ongoing volatility offers both risk and potential reward. The selloff in tech stocks, particularly in heavyweights like Nvidia and Broadcom, presents a buying opportunity for those with a long-term view, as valuations come down from their recent highs. However, the uncertainty around Fed policy and the broader economic outlook could lead to short-term losses.
Additionally, with bond yields fluctuating, there could be gains to be made in Treasury investments, especially if the Fed does implement significant rate cuts in the coming months. However, the risk remains high as market sentiment shifts rapidly based on economic data.
Investors would do well to keep a close eye on next week’s inflation reports and any Fed commentary leading up to their November meeting. As market dynamics evolve, defensive strategies or diversification across asset classes may be prudent.
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