Stocks in the U.S. plunged for a third consecutive trading day, with the Dow Jones Industrial Average tumbling more than 1,200 points, amid growing fears of an economic downturn sparked by a sharp slowdown in hiring and weakening consumer spending.
The S&P 500 slid 129 points, or 2.4%, to 5,217 in early afternoon trading, while the tech-heavy Nasdaq Composite sank 2.9%. Investors are fleeing the Big Tech names that until recently had powered the U.S. market higher: Apple shed 4.2% while Meta fell about 2% in afternoon trading. Chipmaker Nvidia tumbled 5.6%.
The Dow Jones Industrial Average tumbled 1,238 points in early trade but pared some of those losses by early afternoon, when it was down 800 points, or 2%, as of 12:05 p.m. Eastern Time.
The markets regained some of their early losses as Wall Street digested Monday data from the Institute for Supply Management (ISM) Services index, which showed that service employment picked up in July.
“The details of the ISM report were encouraging, with business activity, new orders and employment all rebounding markedly in July,” Oxford Economics said in a Monday research note. The report “aligns with our view of an economy in transition rather than one on the brink of collapse.”
What’s driving down stocks
Stocks began losing ground on Thursday after weak reports on manufacturing and construction, which stoked fears the U.S. economy may finally be buckling under the pressure of high interest rates.
Then on Friday, government data showed that hiring last month was far weaker than expected, adding to Wall Street’s fears that a “soft landing,” in which the U.S. economy could avoid a recession despite the highest interest rates in 23 years, could instead become a hard landing.
“The main factor that has staying power is the economy’s slowdown,” wrote Wells Fargo head of global investment strategy Paul Christopher in a report. “Investors have been watching household financial stress build for the past two years, but during that time, job growth remained above its December 2009-December 2019 average of 180,000 new jobs per month.”
But Friday’s jobs report showed that employers added only 114,000 new jobs last month, far fewer than the 175,000 jobs expected by economists, he noted.
Tech stocks have been hit particularly hard in recent weeks as investors pull back from artificial intelligence companies amid questions about when the emerging sector will deliver profits.
“It has been a tough few weeks for the AI group as earnings were reported,” analysts with Melius Research wrote. ‘Microsoft, Meta, Google and Amazon were all asked about payoffs from AI investments. While pretty clear that they all need to keep spending, the market remains skeptical of the pace.”
The market rout extended to Asian and European markets, with Japan’s benchmark stock index plunging 12.4% on Monday. The Nikkei had dropped 5.8% on Friday, making this its worst two-day decline ever.
Stocks in Korea and Taiwan also fell sharply, with all three Asian markets damaged as investors pull back from companies focused on artificial intelligence out of concern the sector has been overhyped.
European markets also opened lower Monday, with Germany’s DAX down 2.3% at 17,267.00. The CAC 40 in Paris lost 1.9% to 7,114.33 and the FTSE 100 in London was 2.1% lower at 8,004.19.
However, even with Monday’s rout, U.S. stocks still remain positive territory for the year. The S&P 500, for instance, has gained 9% so far this year, even after including the stock market plunge of the prior three days, while the Dow Jones Industrial Average remains up by 3%.
When will the Fed cut rates?
With the disappointing economic data, Wall Street is worried the Federal Reserve may have kept its benchmark interest rate too high for too long, heightening the risk of a recession. The central bank kept the federal funds rate unchanged when it met on July 31 to discuss economic conditions and whether and when it should begin cutting rates.
A rate cut would make it less expensive for U.S. households and companies to borrow money, but it could take time for the effects to boost the economy. On Monday, some investors called for the Fed to start cutting rates sooner rather than later to stave off an economic downturn.
“The Federal Reserve needs to start easing monetary policy more aggressively than had been anticipated, in order to head off a looming recession in the world’s largest economy,” said Nigel Green, CEO of deVere Group, an independent financial advisory and asset management firm, in an email. “The Fed was behind the curve at the beginning of the cycle, it cannot afford to be behind the curve this time too.”
Economists still don’t expect a recession
Although worries over weakness in the U.S. economy and volatile markets have rippled around the world, domestic economic activity remains solid, with many analysts saying that a recession remains unlikely. Stephen Brown, deputy chief North America economist with Capital Economics, still expects a soft landing, while acknowledging that the risk of a sharper downturn is rising.
The economy has accelerated this year, with the nation’s gross domestic product jumping to 2.8% in the second quarter, blowing past forecasts. A recession is typically marked by two consecutive quarters of negative GDP. And although July’s jobs report was disappointing, analysts point out that it reflects just one month of data, while also noting that the depressed hiring figures in July could have also been impacted by Hurricane Beryl.
“It can be a mistake to read too much into a single data release,” noted Solita Marcelli, chief investment officer Americas at UBS Global Wealth Management, told investors in a research note. “The number of people who reported being unable to work [in July] due to the weather was 436,000; this compares to an average of 33,000 for July since 2000.”
—With reporting by the Associated Press.