1 week Ago
Uncertainty over the US economy’s health is rippling through markets, adding fuel to an already-volatile period that has investors grappling with a shift in Federal Reserve policy, a tight US election and worries over stretched valuations. US stocks tumbled on Friday after closely watched jobs data showed labor market momentum slowing more than expected, suggesting a narrower path for the US to achieve a soft landing, in which the Fed is able to cool inflation without badly damaging economic growth. The Fed is expected to cut interest rates at its September 17-18 meeting, but the data revived fears that months of elevated borrowing costs have already started to pressure the economy.
That is a potentially unwelcome development for investors, after prospects for rate cuts against a background of resilient growth helped drive the S&P 500 to record highs this year. “The data shows that we remain on the soft-landing path, but clearly there’s more downside risks to which the markets are going to be sensitive,” said Angelo Kourkafas, senior investment strategist at Edward Jones. “The expectation for elevated volatility is a realistic one.
” Evidence of ebbing risk appetite showed up across markets. The S&P 500 dropped 1.7 per cent on Friday and has lost nearly 4.
3 per cent in the past week, its worst weekly decline since March 2023. Nvidia, the poster child of this year’s artificial intelligence excitement, was down over 4 per cent and stood near its lowest level in about a month, falling along with other high-flying technology names. Meanwhile, the Cboe Market Volatility index, also called Wall Street’s “fear gauge,” hit its highest level in nearly a month on Friday.
“There’s concern that the Fed is not going to be reacting quick enough or more forcefully enough to help prevent something more sinister,” said Keith Lerner, co-chief investment officer, Truist Advisory Services. Several factors threaten to compound the market’s uncertainty. Futures bets on Friday showed investors pricing in a nearly 70 per cent chance of a 25 basis point reduction by the Fed, and 30 per cent chance of a 50 bp cut.
For many, however, the issue remains far from settled. “Markets have had to grapple with - just as the Fed is doing - whether the August payroll data reflects a labor market normalizing towards pre-Covid levels or whether it’s indicative of an economy losing dangerous momentum,” Quincy Krosby, chief global strategist for LPL Financial, said in written commentary. Others took a dimmer view.
Citi analysts said the report warranted a 50 basis point cut later this month. “Investors are saying let’s hope we can have a soft landing,” said Burns McKinney, senior portfolio manager at NFJ Investment Group. “It still feels like it’s fairly likely, but with each weaker jobs number it’s becoming less and less the base case.
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