Most of 2024, investors in the stock market have been happy about a “Goldilocks” economy that is neither too hot nor too cold. More bad U.S. economic news in the beginning of August is making people worry that the bears have come home.
The July jobs report came out on Friday, but it was not as good as expected. It showed that payrolls growth was slowing and the unemployment rate rose to 4.3%. Following a set of weak data the day before, stocks continued their sharp drop.
The prices of Treasury notes went through the roof, and yields fell sharply, especially for notes with shorter terms. This was because investors were betting that the Federal Reserve would start a big round of easing at its September meeting, even though many people think it waited too long to start cutting interest rates.
“One thing is clear: Goldilocks has left the building,” Ian Lyngen, rates strategist at BMO Capital Markets, said in a Friday note. “Even if one is not convinced that the Fed will cut by 50 basis points in September or by 25 bp at each of this year’s three remaining meetings.”
Will she stay away, though?
Some investors think that the market’s response was too strong. A lot of people say that the economy is slowing down and the job market is returning to normal after being very active.
According to Angelo Kourkafas, senior investment strategist at Edward Jones, the market is clearly going through a “growth scare.” However, investors should keep in mind that the “landing” part of a so-called “soft landing” means that both growth and employment slow down.
He said that doesn’t necessarily mean the end of the bull market, but it does mean that trading will be more volatile.
As it turns out, the Cboe Volatility Index VIX 123.00%, which is traded under the symbol VIX and is often called Wall Street’s “fear gauge,” hit a high point of 29.66 on Friday, the highest level since March 2023. The index, which is based on options and shows how volatile people think the next 30 days will be, ended at 23.39, which is above its long-term average of just below 20. This summer, the index has been surprisingly low. Friday’s jump ended a string of 190 trading days with closes below 20. This was the longest such stretch since February 2018, when it ended.
The Dow Jones Industrial Average DJIA -1.51% ended more than 600 points lower, down 1.5% on Friday, making it a five-day drop of 5.4%. Stocks took a beating. During the first two trading days of August, the S&P 500 SPX -1.84% fell more than 3%, and the Nasdaq Composite COMP -2.43% fell 4.7% during the same time period. On Friday, the markets ended in correction, which means they fell at least 10% from their recent high point.
Nicholas Colas, co-founder of DataTrek Research, said in a note on Friday that a “growth scare” and rising volatility go hand in hand. These kinds of scares happen all the time in midcycle markets, and they happen right on time in a month when volatility usually peaks for the year, he wrote.
The change in the story about the market has been building. Some investors and market analysts had warned before that consumer spending was starting to show signs of weakness. This would make it possible for the market story to change from one focused on inflation worries to ones focused on economic growth worries. That makes a growth scare likely, and they often happen before the first Fed rate cuts.
Because of this, bad news about the economy is no longer seen as good for stocks, as we saw on Thursday and Friday. For most of the year, bad data made people more likely to think that the Fed would cut interest rates, which fuelled the rally. Now, bad data makes people worry about a recession and say the Fed messed up by waiting too long to start lowering rates.
It will take some time to see if the economy is really going into a recession or just having a soft landing. But investors should be ready for rough times as we move into the part of the year when volatility tends to rise and seasonal weakness sets in.
Analysts pointed out that the uncertainty surrounding the November presidential election is another wild card.
The market will also be put to the test on Monday, when the July services index from the Institute for Supply Management is made public. Thursday’s low reading for the ISM manufacturing gauge helped start the stock market drop. Investors will now want to know if the much bigger services sector also did badly, Kourkafas said.
He said that the weekly data on jobless benefit claims that come out every Thursday will also be looked closely because Friday’s jobs report added to worries that the job market was about to collapse. Also, Nvidia Corp. NVDA -1.78%’s earnings later this month will be very important. The company has been the biggest winner in the tech-led AI rally.
It’s still worth giving the bull market a chance. In a note, Keith Lerner, chief market strategist and co-chief investment officer at Truist, said, “Going into July, we expected rougher seas, and we expect that to continue as we enter the historically more difficult period of August to September.”
“In fact, the market moves back and forth a lot,” he wrote.
