Stocks got hit at the start of a historically tough month for the market, with investors bracing for economic data that will show whether or not the Federal Reserve will need to be aggressive with rate cuts.
Wall Street traders took risk off the table, with the S&P 500 seeing its worst slump since the Aug. 5 market meltdown. That's after a rally that put the benchmark within a striking distance of its all-time highs.
The gauge's most-influential group — technology — sold off on Tuesday, with Nvidia Corp. driving a plunge in chipmakers. Energy shares tumbled as oil erased its 2024 gains. Wall Street's "fear gauge" — the VIX — topped 18. Bonds climbed.
With inflation expectations fairly anchored, attention has shifted to the health of the economy as signs of weakness could speed up policy easing.
While rate cuts tend to bode well for equities, that's not necessarily the case when the Fed is rushing to prevent a bigger U.S. slowdown. The trepidation regarding the latest rise in the unemployment rate will leave traders "on edge" until Friday's payrolls data is in hand, said Ian Lyngen and Vail Hartman at BMO Capital Markets.
"This week's jobs report, while not the sole determinant, will likely be a key factor in the Fed's decision between a 25 or 50 basis-point cut," said Jason Pride and Michael Reynolds at Glenmede. "Even modest signals in this week's jobs report could be a key decision point as to whether the Fed takes a more cautious or aggressive approach."
To Callie Cox at Ritholtz Wealth Management, aside from the macro picture, there's also the fact that we're entering what's often a "miserable time" of the year for equities.
"While history isn't gospel, it's not crazy to think that this September could be especially volatile," Cox noted. "But this isn't the conclusion to draw from decades of seasonal market data. Instead, your attention should be on why this is a "buyable dip, because there are a lot of reasons to be optimistic here."
Among those, she cited: earnings growth, the Fed about to start easing policy against the backdrop of controlled inflation and the fact that investors are sitting on a massive pile of cash "that could make its way back into stocks."
The S&P 500 dropped 1.6%. The gauge is drifting down toward 5,550, a level at which there's large open interest in options expiring later this month, making that a level to watch.
The Nasdaq 100 slid 2.5%. The Dow Jones Industrial Average fell 1.2%. The Russell 2000 of small firms lost 2.7%. Nvidia slumped 8%. Boeing Co. sank 7.5% on an analyst downgrade.
Treasury 10-year yields fell five basis points to 3.85%. A record number of blue-chip firms are swarming the corporate-bond market, taking advantage of cheaper borrowing costs ahead of the U.S. presidential election.
The yen climbed as Bank of Japan Governor Kazuo Ueda reiterated the central bank will continue to raise rates if the economy and prices perform as expected.
The Morgan Stanley strategist who foresaw last month's market correction says firms that have lagged the rally in U.S. stocks could get a boost if Friday's jobs data provide evidence of a resilient economy. A stronger-than-expected payrolls number would likely give investors "greater confidence that growth risks have subsided," Michael Wilson wrote.
The equity-market rally may stall near record highs even if the Fed starts a highly anticipated rate-cutting cycle, JPMorgan Chase & Co. strategists said earlier this week. The team led by Mislav Matejka noted that any policy easing would be in response to slowing growth, making it a "reactive" reduction."
"We are not out of the woods yet," Matejka wrote in a note, reiterating his preference for defensive sectors against the backdrop of a pullback in bond yields. "Sentiment and positioning indicators look far from attractive, political and geopolitical uncertainty is elevated, and seasonals are more challenging again in September."
