US stock market had their worst week since March 2023, with bonds fluctuating after a weak US jobs report raised concerns about a slowing economy and the Federal Reserve’s response.
The S&P 500 fell 1.7%, and the Nasdaq 100 dropped 2.7% as payroll additions in August missed expectations by 23,000.
Treasury two-year yields initially dropped but later recovered. Wall Street’s hopes for a half-point Fed rate cut diminished, despite Fed Governor Christopher Waller expressing openness to a larger cut.
Labor Market Data Raises Concerns
Nonfarm payrolls rose by 142,000 in August, marking the lowest three-month average since mid-2020. The unemployment rate dropped to 4.2%, the first decline in five months.
Some analysts, like Steven Blitz from TS Lombard, warned that the economy might be nearing a critial turning point, with the Fed’s response being crucial to the market’s direction.
Market Performance and Sector Highlights
Most sectors of the S&P 500 declined, led by tech. Nvidia lost 4%, and Broadcom fell 10% on a weak forecast. The Dow fell 1%, the Russell 2000 dropped 1.9%, and the VIX, a measure of market volatility, hit 22. Bitcoin and oil also saw declines.
Some traders are betting on a quarter-point Fed rate cut in September, though others believe a bigger move is possible.
Weekly Market Recap
For the week:
- S&P 500: -4.3%
- Nasdaq Composite: -5.8%
- Dow Jones: -2.9%
Friday’s Closing levels:
| Index | Close | Change | % Change |
| Dow Jones | 40,345.41 | -410.34 | -1.01% |
| S&P 500 | 5,408.42 | -94.99 | -1.73% |
| Nasdaq Composite | 16,690.83 | -436.83 | -2.55% |
| US 10-Year Yield | 3.713% | ||
| US 2-Year Yield | 3.654% | ||
| VIX | 22.38 | +2.48 | +12.46% |
Shift in Market Sentiment
The market’s reaction to Friday’s unemployment report indicates a shift in sentiment. Previously, a report like this might have sparked a rally in a bullish market; however, the current environment is more risk-averse, with selloffs following any attempt at a bounce. The bears have control for now, and any signs of recovery are met with more selling.
The odds currently suggest a 70% chance of a 25 basis-point rate cut at the next Fed meeting. That estimate seems reasonable as there isn’t an urgent need for significant cuts; the economy isn’t in a free fall.
However, what is significant is that the 2-year/10-year (2s10s) spread has turned positive, historically a warning sign of an impending recession. This could lead to further selling as bullish investors start to get nervous or, worse, begin to panic.
Technical Outlook and Upcoming Data
We could see more selling on Monday, given the negative technical signals and the way prices closed on Friday. The market needs to find some support; otherwise, things could escalate. Additionally, inflation numbers are due this week, which could add more volatility to an already shaky market.
Broader Market Factors to Watch
Several factors are creating a complex trading environment:
- The Japanese Yen (JPY) is nearing levels seen before its crash a month ago.
- Rotation out of tech stocks appears to be continuing.
- Bond yields are falling.
- Oil prices are dipping below $70.
- The VIX, a fear gauge, is starting to rise to concerning levels.
All these factors suggest that September could be as challenging as many have warned. However, don’t be surprised if we see some relief rallies along the way. If these rallies can break through resistance levels, there could be a chance for the bulls to regain control. As always, hope for the best but prepare for the worst.
Source: CBOE, Bloomberg
This commentary is written by James Gomes, a seasoned finance industry veteran with extensive experience of over 30 years, including a substantial tenure at a reputable US bank exceeding 20 years.
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