Wall Street Suffers Sharpest Weekly Decline in Over a Year as Labor Market Cools
The SPY, an exchange-traded fund (ETF) tracking the performance of the S&P 500 index, closed 1.7% lower on Friday, pushing the index’s weekly loss to a staggering 4.1%. This marked the most significant weekly decline since the banking crisis that rocked markets in March 2023. The sell-off was triggered by a weaker-than-expected labor market report released on Friday, leading investors to adopt a “risk-off” sentiment.
Key Takeaways:
- The S&P 500 experienced its most substantial weekly decline in over a year, fueled by a surprising drop in non-farm payroll additions.
- Tech stocks, particularly semiconductors, were disproportionately hit, with the Nasdaq Composite experiencing its worst weekly performance since October 2022.
- A cooling labor market, evidenced by the subdued job growth and the sluggish pace of hiring, indicated a shift in the economic outlook, leading investors to reassess risk appetite.
- While the unemployment rate ticked down, the slowdown in job creation fueled a “risk-off” sentiment, contributing to market volatility.
- Analysts and economists, including Ed Yardeni and Shruti Mishra, stressed that the labor market, while showing signs of softening, did not yet indicate a recession.
- The subdued job creation data prompted Bank of America to revise its Federal Reserve interest rate cut outlook, indicating a more gradual approach to easing monetary policy.
A Deeper Dive into the Labor Market Data
The August non-farm payroll report revealed a significant drop in job growth, adding just 142,000 jobs, falling short of the expected 160,000 and significantly below the one-year average of 202,000 new jobs per month. While the unemployment rate did edge down from 4.3% to 4.2%, in line with expectations, the slowdown in hiring raised eyebrows amongst investors and analysts alike.
Veteran Wall Street investor Ed Yardeni, while acknowledging the weaker-than-expected employment report, remained optimistic about the broader economic outlook. He emphasized that while employers are not engaging in mass layoffs, the rate of new hiring has slowed, suggesting a cooling labor market. This aligns with the observation of Bank of America economist Shruti Mishra, who highlighted that the moderation in the labor market is characterized by low layoffs and a gradual decrease in new hiring.
The Impact on Monetary Policy Expectations
The softer jobs data triggered a reassessment of the Federal Reserve’s likely path for monetary policy. Bank of America, in response to the data, revised its forecast for rate cuts. Previously, the bank anticipated 25 basis point cuts per quarter starting in September. However, in light of the new data, it now projects the Fed to trim rates by 25 basis points at each meeting for the next five sessions, bringing the policy rate down to 4% by March 2025. This adjustment reflects the bank’s updated view that the labor market slowdown might require more gradual and measured steps by the Fed to ease monetary policy and support the economy.
The Semiconductor Sector Bears the Brunt of the Sell-Off
The semiconductor industry was particularly hard hit during Friday’s sell-off, with the SOXX, an ETF tracking the performance of semiconductor stocks, plummeting 4.3% on Friday alone, resulting in an 11.8% drop for the week. This marked the sector’s worst weekly performance since March 2020.
Among the worst-performing semiconductor companies were:
- Broadcom Inc. (AVGO): -10.35%
- Wolfspeed, Inc. (WOLF): -6.53%
- ASML Holding N.V. (ASML): -5.37%
- Rambus Inc. (RMBS): -5.28%
- Marvell Technology, Inc. (MRVL): -5.25%
The semiconductor sector’s vulnerability stems from its sensitivity to economic conditions. A slowing economy often leads to reduced demand for semiconductors, impacting the industry’s overall performance.
The S&P 500’s Top Five Contributors to Friday’s Decline
Here’s a breakdown of the top five contributors to Friday’s decline in the S&P 500:
| Name | Weight (%) | Return (%) | Contribution (bps) |
|---|---|---|---|
| NVIDIA Corporation | 5.69 | -4.04 | -24 |
| Broadcom Inc. (AVGO) | 1.44 | -10.35 | -16 |
| Amazon.com, Inc. (AMZN) | 3.51 | -3.64 | -13 |
| Tesla, Inc. (TSLA) | 1.38 | -8.44 | -13 |
| Microsoft Corporation (MSFT) | 6.55 | -1.63 | -11 |
These companies’ significant weight in the S&P 500, combined with their negative performance on Friday, exerted a substantial downward pressure on the index.
Looking Ahead: A Period of Uncertainty
While the drop in job growth raised concerns about the economy’s trajectory, it’s crucial to remember that a single data point does not define an economic trend. The labor market’s cooling does not necessarily signal a recession, as emphasized by analysts. However, it does indicate a shift in investor sentiment, prompting them to reassess risk appetite and reevaluate their expectations for economic growth. The extent of the market’s reaction to this data underscores the sensitivity of investor confidence to changes in economic signals. The coming weeks and months will reveal whether this cooling trend is a temporary blip or a sign of a more significant shift. In the meantime, investors are advised to closely monitor developments in the labor market and its implications for the broader economy.
