Wall Street was jolted by rising economic uncertainty on Friday, with stocks skidding and capping off a turbulent week with a sharp decline. The drop followed a report on U.S. hiring in July that was far weaker than expected, startling investors into worrying that the Federal Reserve has been too slow to cut interest rates. Traders were already growing uneasy about the state of the economy, as well as the prospects for the big technology stocks that had underpinned a market rally for much of the year, but the jobs report intensified the focus on the risks.
The S&P 500 fell 1.8 percent, while the tech-heavy Nasdaq dropped 2.4 percent. Small stocks, yields on government bonds, and oil prices, all of which are sensitive to expectations for the economy, dropped too. Employers in the U.S. added 114,000 jobs in July, on a seasonally adjusted basis, much fewer than economists had expected and a significant drop from the average of 215,000 jobs added over the previous 12 months, the Labor Department said. The unemployment rate rose to 4.3 percent, the highest level since October 2021.
“That all-important macro data we have been hammering for months is finally starting to turn in an ominous direction,” said Alex McGrath, chief investment officer at NorthEnd Private Wealth. Investors are reassessing how aggressive the Fed may have to be as it starts to cut interest rates — if weakening economic conditions justify a bigger rate cut than the central bank has indicated so far. The central bank raised rates to a two-decade high as it tried to wrestle inflation under control, but policymakers now have to decide when to cut, and by how much, in order to forestall a recession.
Markets are now predicting a half a percent cut when the Fed meets next in September, up from the more usual quarter-point cut investors had been anticipating as of Thursday, according to CME FedWatch. The two-year Treasury yield, which is also reflective of short-term interest rate expectations, fell 26 basis points, to 3.9 percent, on Friday. The 10-year U.S. Treasury yield — which underpins many other borrowing costs — fell to 3.8 percent, after dropping below 4 percent on Thursday.
“This is very much a real case of be careful what you wish for,” said Steve Sosnick, the chief strategist at Interactive Brokers. “All the sudden, everybody decided, ‘Uh oh, they’re late.’” Sentiment could change again, of course. Before the Fed meets in September, it will get another update on the health of the job market and fresh inflation data to consider. With the economy still growing, and the labor market still relatively healthy, past bouts of turbulence in the market have ended just as quickly as they began.
But there are other factors weighing on stocks. Investors started reconsidering their appetite for big technology stocks last month and bought up shares of smaller companies, which are particularly sensitive to borrowing costs and stand to benefit from interest rate cuts. Also driving this shift is a rethink about the potential for artificial intelligence to continue to drive gains at big companies like Microsoft, Nvidia and Alphabet, after shares of those businesses surged in the past year.
Underwhelming earnings reports from major tech companies were another blow to tech stocks on Friday. Amazon’s shares fell about 9 percent, while Intel’s declined 26 percent. This week’s volatility reflects a “sea change in psychology” among investors who have been hoping for conditions that would allow the Fed to cut interest rates. Lower interest rates are a boon for the economy but if they come because the Fed is worried about growth, that could hurt sentiment.
In conclusion, the economic uncertainty that jolted Wall Street on Friday has highlighted the delicate balance that the Federal Reserve must strike in managing interest rates to support economic growth while preventing a recession. The market’s reaction to the weaker-than-expected jobs report and the subsequent decline in stocks underscores the importance of closely monitoring economic indicators and policy decisions in the coming months. Investors will be watching closely as the Fed considers its next steps and how they may impact the broader economy and financial markets.
