“The Fed could ride in on a white horse to save the day with a big rate cut, but the case for an inter-meeting cut seems flimsy,” said Brian Jacobsen, chief economist at Annex Wealth Management. “Those are usually reserved for emergencies, like COVID, and an unemployment rate of 4.3 per cent doesn’t really seem like an emergency.”
The US economy is still growing, and a recession is far from a certainty. The Fed has been clear about the tightrope it began walking when it started hiking rates sharply in March 2022: Being too aggressive would choke the economy, but going too soft would give inflation more oxygen and hurt everyone.
Goldman Sachs economist David Mericle sees a higher chance of a recession within the next 12 months following Friday’s jobs report. But he still sees only a 25 per cent probability of that, up from 15 per cent, in part “because the data look fine overall” and he does not “see major financial imbalances.”
Some of Wall Street’s recent declines may also simply be air coming out of a stock market that romped to dozens of all-time highs this year, in part on a frenzy around artificial-intelligence technology and hopes for coming cuts to interest rates. Critics have been saying for a while that the stock market looked expensive after prices rose faster than corporate profits.
“Markets tend to move higher like they’re climbing stairs, and they go down like they’re falling out a window,” according to JJ Kinahan, CEO of IG North America. He chalks much of the recent worries to euphoria around AI subsiding and “a market that was ahead of itself.”
Professional investors also pointed to the Bank of Japan’s move last week to raise its main interest rate from nearly zero. Such a move helps boost the value of the Japanese yen, but it could also force traders to scramble out of deals where they borrowed money for virtually no cost in Japan and invested it elsewhere around the world.
US stocks pared their losses Monday after a report said growth for US services businesses was a touch stronger than expected. Growth was led by businesses in the arts, entertainment and recreation businesses, along with accommodations and food services, according to the Institute for Supply Management. Treasury yields also pared their drops following the better-than-expected data.
Still, stocks of companies whose profits are most closely tied to the economy’s strength took sharp losses on the fears about a slowdown. The small companies in the Russell 2000 index dropped 2.8 per cent, further dousing what had been a revival for it and other beaten-down areas of the market.
Making things worse for Wall Street, Big Tech stocks also tumbled as the market’s most popular trade for much of this year continued to unravel. Apple, Nvidia and a handful of other Big Tech stocks known as the “Magnificent Seven ” had propelled the S&P 500 to records this year, even as high interest rates weighed down much of the rest of the stock market.
But Big Tech’s momentum turned last month on worries investors had taken their prices too high and expectations for future growth are becoming too difficult to meet. A set of underwhelming profit reports that began with updates from Tesla and Alphabet added to the pessimism and accelerated the declines.
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Apple fell 4.8 per cent Monday after Warren Buffett’s Berkshire Hathaway disclosed that it had slashed its ownership stake in the iPhone maker.
Nvidia, the chip company that’s become the poster child of Wall Street’s AI bonanza, fell even more, 6.4 per cent. Analysts cut their profit forecasts over the weekend for the company after a report from The Information said Nvidia’s new AI chip is delayed. The recent selling has trimmed Nvidia’s gain for the year to 104 per cent from 170 per cent in the middle of June.
Because the Magnificent Seven companies are the market’s biggest by market value, the movements for their stocks carry much more weight on the S&P 500 and other indexes.
Worries outside corporate profits, interest rates and the economy are also weighing on the market. The Israel-Hamas war may be worsening, which beyond its human toll could also cause sharp swings for the price of oil. That’s adding to broader worries about potential hotspots around the world, while upcoming US elections could further scramble things.
Wall Street has been concerned about how policies coming out of November could impact markets, but the sharp swings for stock prices could affect the election itself.
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The threat of a recession is likely to put Vice President Kamala Harris on the defensive. But slower growth could also further reduce inflation and force former President Donald Trump to pivot from his current focus on higher prices to outlining ways to revive the economy.
A strong jobs market supports consumer spending, which drives economic growth. The link between employment and spending will remain a key focus heading into the US presidential election, said Quincy Krosby, chief global strategist for LPL Financial.
“It comes down to jobs,” she said. “When we get to election day, the unemployment rate is going to be extremely important.”
AP
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