Wall Street Reels After Weak Jobs Report Sparks Recession Fears
The stock market experienced a sharp downturn last week, driven by a weak July jobs report that has reignited recession fears and shifted investor sentiment. The report, which revealed far fewer job gains than anticipated, marked a turning point in the narrative of a strong labor market, a key pillar supporting the economy amidst persistent inflation and aggressive rate hikes. The Nasdaq Composite, heavily weighted towards tech stocks, closed the week on the cusp of a correction, falling by 10% from its recent high. The S&P 500 also experienced its worst day in nearly two years.
Key Takeaways:
- The July jobs report came in significantly lower than expected, signaling a potential weakening of the labor market.
- This triggered the widely-followed Sahm Rule recession indicator, which is activated when the three-month moving average of the US unemployment rate rises by half a percentage point above its 12-month low.
- Treasury yields plummeted, with the 10-year note reaching its lowest point since December, highlighting concerns about economic slowdown.
- The CBOE Volatility Index, known as Wall Street’s "fear gauge", surged to its highest level since March 2023, indicating heightened market anxiety.
- Investors are now pricing in the likelihood of an economic slowdown or even a recession, leading to a shift in investment strategies.
The Impact of the Weak Jobs Report
The July jobs report, released on Friday, showed a significant slowdown in job growth, adding only 200,000 jobs compared to the consensus estimate of 250,000. This marked a significant deviation from the robust job creation figures seen in previous months, raising concerns about the health of the labor market.
"A 10% pullback in the markets is not that unusual. We typically get one of those on average about once a year," explained Bill Hornbarger, investment chief at Benjamin F. Edwards. "I think the softer [economic] data is just a really good excuse for people to be taking profits."
The report’s impact extended beyond the stock market, sending shockwaves through the bond market as well. Treasury yields, which move inversely to bond prices, tumbled, indicating a flight to safety. The 10-year note yielded as low as 3.79% on Friday, down from 4.20% the previous week, reaching its lowest level since December. This decline suggests investors are anticipating a weaker economic outlook, potentially leading to lower interest rates in the future.
Recession Concerns Rise
The weak jobs report, coupled with other recent economic indicators, has fueled fears of an impending recession. The Sahm Rule, a widely-followed recession indicator developed by economist Claudia Sahm, was triggered by the jobs report. This rule signals a recession when the three-month moving average of the unemployment rate increases by half a percentage point above its 12-month low.
The report also triggered a spike in market volatility, with the CBOE Volatility Index (VIX), known as Wall Street’s "fear gauge," surging towards 30, its highest point since March 2023. This indicates a heightened level of uncertainty and anxiety amongst investors.
Shifting Investment Strategies
The recent market turmoil has prompted a shift in investment strategies, with many investors seeking safety and quality. Michael Kantrowitz, chief investment strategist at Piper Sandler, cautioned that lower interest rates are no longer a bullish catalyst for stocks. He recommends allocating to higher quality stocks, with specific preference for utilities.
"We expect that we will see a positive correlation between interest rates and stock prices going forward," Kantrowitz wrote.
The Fed’s Next Move
The Federal Reserve’s next move on interest rates is now shrouded in uncertainty. While the Fed has been aggressively raising interest rates to combat inflation, the weak jobs report raises questions about the path forward.
Despite the recent downturn, Jan Hatzius, chief economist at Goldman Sachs, remains optimistic, stating that he does not anticipate a recession. He emphasizes that the Fed still has room to maneuver with the current federal funds rate at 5.25%-5.50%.
"They have 525 basis points of cuts" available to them, Hatzius told CNBC’s "Squawk on the Street." "And while I don’t expect the 50 basis point move at the next meeting, they could deliver a lot of easing if necessary."
Markets are now pricing in a 71% chance of a half percentage point rate cut in September, up from 22% on Thursday, according to the CME FedWatch Tool.
"I think there is a case that needs to be discussed for going more quickly than the very glacial sort of normalization that is in the dotplot, but we will still get more information before the next [Fed policy] meeting," Hatzius said.
Upcoming Corporate Earnings Reports
The next week will see a flurry of second quarter corporate earnings reports, providing further insights into the state of the economy. Notable companies releasing their reports include Walt Disney Company, Caterpillar, Costco, Eli Lilly, and Super Micro Computer.
Earnings Reports
Monday, August 5th:
- Simon Property Group
- Diamondback Energy
- Tyson Foods
- Progressive
Tuesday, August 6th:
- Super Micro Computer
- Fortinet
- Devon Energy
- Airbnb
- Wynn Resorts
- Axon Enterprise
- TransDigm Group
- Yum! Brands
- Fidelity National Information Services
- Uber Technologies
- Marathon Petroleum
- Caterpillar
Wednesday, August 7th:
- Costco Wholesale
- Warner Bros. Discovery
- Occidental Petroleum
- Ralph Lauren
- CVS Health
- Hilton Worldwide Holdings
- Walt Disney Company
Thursday, August 8th:
- Gilead Sciences
- Akamai Technologies
- Take-Two Interactive Software
- News Corp.
- Paramount Global
- Expedia Group
- Martin Marietta Materials
- Eli Lilly & Co.
Friday, August 9th:
- No notable events
Economic Indicators
Monday, August 5th:
- 9:45 a.m. PMI Composite final (July)
- 9:45 a.m. S&P PMI Services final (July)
- 10:00 a.m. ISM Services PMI (July)
Tuesday, August 6th:
- 8:30 a.m. Trade Balance (June)
Wednesday, August 7th:
- 3:00 p.m. Consumer Credit (June)
Thursday, August 8th:
- 8:30 a.m. Continuing Jobless Claims (July 27th)
- 8:30 a.m. Initial Claims (August 3rd)
- 10:00 a.m. Wholesale Inventories final (June)
Conclusion
The weak jobs report has shaken investor confidence, triggering a market sell-off and heightening concerns about a potential recession. The Federal Reserve faces a challenging balancing act, needing to manage inflation while considering the potential risks of an economic slowdown. The coming weeks will be crucial in determining the impact of recent economic data on the market and the path forward for the Fed. Investors and economists alike will be closely watching for signs of an economic rebound or a continued downturn, with the upcoming earnings season and economic indicators providing valuable insights.
