After a closely watched measure showed more weakness in the manufacturing sector on Tuesday, September began with a sense of déjà vu for stock market investors. Major indexes ended the day sharply lower.
After all, August began with a big drop after the factory index from the Institute for Supply Management fell for the fourth month in a row in July. The August ISM manufacturing index went up again on Tuesday, but it stayed below 50, which means the sector shrank for a fifth month in a row.
In a note, Peter Boockvar, chief investment officer at Bleakley Financial Group, said, “U.S. manufacturing remains in a recession with little sign that the situation will change any time soon. But we’ll see how much, if any, some rate cuts will help bring about some more activity.”
“There’s more proof that bad economic news hurts stocks and good economic news hurts stocks,” he wrote.
According to early numbers, the Dow Jones Industrial Average DJIA -1.51% dropped 626.15 points, or 1.5%, to end the day at 40,936.93. The tech-heavy Nasdaq Composite COMP -3.26% fell 3.3% and the S&P 500 SPX -2.12% fell 2.1%. Dow Jones Market Data says it was the biggest drop in the Nasdaq on the first trading day of any month since April 2020. It was also the biggest drop for the S&P 500 since May 2020 and for the Dow since March 2022.
It shows how volatile the S&P 500 is likely to be over the next 30 days. The Cboe Volatility Index VIX 38.13% was up 33.8% at 20.07. The index, which is often called Wall Street’s “fear gauge,” went through a record high above 65 at the beginning of last month before falling back below its long-term average near 20.
The ISM report wasn’t the only thing that caused the stock market to drop so badly in early August. Some experts say that a full-blown growth scare was caused by a rise in weekly first-time jobless claims and a weaker-than-expected July jobs report. It got worse as the famous Japanese yen USDJPY 0.02% carry trade ended, which made losses bigger.
But the comeback was also quick. Stocks went up again as the carry-trade unwind ended and new data showed that the U.S. economy was strong. Friday was the 26th record close for the Dow and the S&P 500. The S&P 500 was only 0.3% away from its all-time high. In the first eight months of the year, the S&P 500 was up 18.4%. The Dow was up 10.3%, and the Nasdaq was up 18%.
The market is still very sensitive to economic data, especially Friday’s August jobs report. This was shown by Tuesday’s drop.
In addition, September has generally been the worst month for U.S. stocks. Also, it’s election year, and investors are keeping an eye on the crazy but too-close-to-call race for president.
Analysts say that the stock market’s rise back to all-time highs shows that selloffs could happen after bad news.
U.S. stock prices have become even more overvalued, and BeiChen Lin, an investment strategist at Russell Investments, said that the firm’s own mood measure shows that “noticeable optimism” is already priced into the markets.
“Given this background, it’s very easy for stock markets to lose money on even the smallest bit of bad news,” the expert wrote in a note. “Because of this, we’d rather be safe and rebalance portfolios back to policy weights than chase short-term equity momentum.”
