The selloff in stocks intensified and bond yields tumbled as a weak jobs report fueled worries that the Federal Reserve's decision to hold rates at a two-decade high is risking a deeper economic slowdown.
Those fears roiled trading around the globe, spurring a massive surge in volatility while triggering a flight away from the riskier corners of the market.
The S&P 500 is poised for its worst reaction to jobs data in almost two years. A plunge in key technology companies sent the Nasdaq 100 down 10% from its peak, matching the definition of a "correction."
A rally in Treasuries extended into a seventh straight day, with traders projecting the Fed will cut rates by a full percentage point in 2024.
The rout in equities follows a rally to multiple records this year amid bets the central bank would be able to achieve a "soft landing", and keep driving gains in Corporate America.
While the Fed has been able to successfully bring down inflation, the latest jobs figures may give officials some reason to believe that their policies are cooling the labor market too much.
"Bad news is no longer good news for stocks," said John Lynch at Comerica Wealth Management. "Of course, we're in a period of seasonal weakness, but sentiment is fragile given economic, political, and geopolitical developments. Pressure will escalate on the Federal Reserve."
Another reason for Wall Street's jitters is concern that the latest data might be showing the Fed is "behind the curve." While Jerome Powell has signaled that rates will likely be lowered in September, some investors have argued the Fed should have moved faster.
"Oh dear, has the Fed made a policy mistake?" said Seema Shah at Principal Asset Management. "The labor market's slowdown is now materializing with more clarity. A September rate cut is in the bag and the Fed will be hoping that they haven't, once again, been too slow to act."
The S&P 500 slid 2.2%. The Nasdaq 100 sank 2.5%. The Russell 2000 tumbled 3.7%.
Wall Street's "fear gauge" — the VIX — soared toward its highest since March 2023.
Intel Corp. plunged about 30% on a grim growth forecast. Amazon.com Inc. slid 10% on a profit miss. Apple Inc. climbed 2.5%.
Treasury 10-year yields declined 17 basis points to 3.8%. The dollar fell 0.7%.
Nonfarm payrolls rose by 114,000 — one of the weakest prints since the pandemic — and job growth was revised lower in the prior two months. The unemployment rate unexpectedly climbed for a fourth month to 4.3%, triggering a closely watched recession indicator and hammering stocks.
"The big question is are we sliding right into a recession?" said Ryan Detrick at Carson Group. "Or is the economy simply hitting a rough spot? We'd side with we will still avoid a recession, but the risks are rising."
Stocks are likely to fall when the Fed delivers its first interest-rate cut because the pivot will come as data signal a hard — rather than soft — landing for the US economy, according to Bank of America Corp.'s Michael Hartnett.
In the history of the start to Fed easing since 1970, cuts in response to a downturn have proved negative for stocks and positive for bonds, the BofA strategist wrote in a note, citing seven examples that demonstrated this pattern. "One very important difference in 2024 is extreme degree to which risk assets have front-run Fed cuts," Hartnett said.
To Lara Castleton at Janus Henderson Investors, the "soft landing narrative" is now shifting to "worries about a hard landing." While worries of a policy mistake are rising, she thinks one negative miss shouldn't lead to overreaction given that other data points that still show economic resilience.
"Equities selling off should be seen as a normal reaction, especially considering the high valuations in many pockets of the market," she said. "It's a good reminder for investors to focus on the earnings of companies going forward."
With just three meetings left, swap pricing shows anticipation that the Fed will make an unusually large half-point move at one of the gatherings or act between its scheduled meetings — signaling that policymakers will start moving rapidly to bolster growth.
Wall Street banks are ramping up expectations for an aggressive Fed easing cycle based on the latest evidence that the labor market is cooling.
Economists at Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc. and JPMorgan Chase & Co. revamped their forecasts for US monetary policy Friday after data showed the US unemployment rate rose again in July, calling for earlier, bigger or more interest-rate cuts.
"Pressure will escalate on the Fed as market interest rates will continue the attempt to force their hand," said John Lynch at Comerica Wealth Management.
