Stock slide as investors wrestle with shifting bets on rate cuts
Stocks fell at the end of a bruising week for Wall Street, as investors grappled with weaker than expected labor market data and a warning from a Federal Reserve governor that bigger than usual rate cuts may be needed to avoid a sharp economic slowdown.
The S&P 500 fell 1.7% on Friday, its fourth consecutive daily decline, leaving the index down about 4.2% for last week, its worst week since March 2023. Other stock gauges also fared poorly, with the Nasdaq Composite dropping 2.6% and the Russell 2000 index of smaller companies slumping 1.6%.
The Bureau of Labor Statistics reported Friday that employers added 142,000 jobs in August. That was fewer than economists expected, and the hiring numbers for June and July were also revised downward.
On the heels of fresh data, Chris Waller, a Fed governor, hinted at the possibility of a larger half-percentage point cut later this month, saying that “the current batch of data no longer requires patience, it requires action.”
With uncertainty over the economic outlook, investors have been left jittery. Stocks had steadily rallied for the first half of the year, leaving many investors sitting on healthy returns. The S&P 500 peaked in July, with a gain of over 18% for the year. Even after the recent pullback from those highs, the index remains roughly 13% higher for the year.
Investors appear keen not to sacrifice gains made earlier in the year by betting that the rally could still inch a little higher: An August survey of fund managers by Bank of America showed that while most still expect the economy to keep growing as the Fed lowers interest rates, the level of concern over a misstep by the central bank is high.
The strength of the rally has also left little room for optimism, some investors warned. If the economy slows more quickly than expected, then the Fed will likely increase the speed at which it cuts rates. Lower rates are typically positive for the stock market but not if it is accompanied by a sharper economic slowdown. If the economy outperforms, then rates are likely to stay higher for longer, raising the risk of the Fed keeping the brake on the economy for too long and eventually resulting in a downturn.
The stock market “can’t win” at the moment, said Andrew Brenner, head of international fixed income at National Alliance Securities. “Heads I lose, tails I lose,” he said.
Investors are betting that the Fed will lower interest rates by a quarter of a percentage point when the central bank meets later this month, but those bets – drawn from prices in interest rate futures markets – swung Friday up toward a possible half-point cut before falling back again, pointing to investors’ uncertainty over the path ahead.
“There isn’t much precedent for a move that big outside of some very obvious economic weakness or panic in the markets,” said John Luke Tyner, an analyst at Aptus Capital Advisors. “We’re not there yet.”
September is typically a weak month for the stock market. The last time the S&P 500 rose in September was in 2019. The slide this week marks the index’s worst since September of last year.
Oil prices also fell sharply this week, a harbinger of economic gloom. Brent crude, the international benchmark, slipped to its lowest point of the year, at about $71 a barrel on Friday.
Lauren Goodwin, an economist at New York Life Investments, said she expected the Fed to choose a smaller, quarter-point rate cut this month, partly fueled by concern that a bigger move could spook the market if it’s not tied to economic data that clearly shows the economy headed into a downturn.
“At this point, the biggest risk to the economy, which is of course what the Fed is worried about, is the market itself,” she said.
This article originally appeared in The New York Times.