US Stocks Crash as Recession Worries Resurface After Jobs Data

US stocks crashed on Friday and the Nasdaq Composite fell 2.5% while the broad-based S&P 500 shed 1.7%. The Nasdaq had its worst week since 2022 and is now in a correction zone after having fallen over 10% from its recent highs.

There have been intermittent concerns over the deepening slowdown in the US economy, especially the employment sector. Nonfarm payroll data released yesterday showed that the world’s largest economy added a mere 142,000 jobs in August. While the numbers were still better than in July when nonfarm payrolls slumped to 89,000, they were significantly below the 161,000 that economists were expecting.

US Nonfarm Payrolls Data Disappointed Markets

Also, the Bureau of Labor Statistics downwardly revised the employment numbers for June and July by 118,000 and 25,000 respectively. The overall unemployment rate was 4.2% in August – which was in line with estimates. However, the real unemployment rate was 7.9% which was the highest since October 2021.

Commenting on the data, Dan North, senior economist for North America at Allianz Trade said, “I don’t like this a whole lot. It’s not disaster, but it’s below expectations on the headline, and what really bothers me is the revisions.” He added, “This is certainly going the wrong way.”

Recession and Growth Worries Resurface After August Jobs Report

Notably, one of the reasons US stocks crashed towards the beginning of August was weak July jobs data. That, coupled with the rise in Japanese interest rates, led to a sell-off in global markets. However, US stocks eventually closed the month in the green and the S&P 500 extended its winning streak to four months.

Notably, when the Fed was on a rate hiking spree between March 2022 and July 2023, chair Jerome Powell warned several times that the US central bank’s monetary tightening could push the US economy into a recession – even if that’s not an economic outcome it intends.

While US inflation has gradually come down, economic indicators suggest a weakening of the economy. In his prepared remarks for the Senate testimony earlier this year, Powell admitted, “In light of the progress made both in lowering inflation and in cooling the labor market over the past two years, elevated inflation is not the only risk we face.”

He added, “Reducing policy restraint too late or too little could unduly weaken economic activity and employment.”

Powell and other Fed officials have raised multiple times that the US central bank won’t wait for inflation to drop to 2% before it starts cutting rates.

Powell’s Rate Cut Remarks Triggered a Rally in US Stocks Last Month

Last month, at the Fed’s annual retreat in Jackson Hole, Powell said, “The time has come for policy to adjust.” He added, “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”

While Fed officials have sounded dovish for quite some time now, Powell’s comments at Jackson Hole raised expectations of a September rate cut. His comments also led to a rally in US stocks and helped them recoup the losses from the global sell-off in early August.

Will Fed Go for a 50 Basis Point Rate Cut?

According to the CME FedWatch Tool, the odds of a 25-basis point rate cut in September are 70% while that of a 50-basis point rate cut is 30%. According to Seema Shah, chief global strategist at Principal Asset Management, “For the Fed, the decision comes down to deciding which is the bigger risk: reigniting inflation pressures if they cut by 50 [basis points] or threatening recession if they only cut by 25 [basis points].”

She added, “On balance, with inflation pressures subdued, there is no reason for the Fed not to err on the side of caution and frontload rate cuts.”

However, Carl Weinberg, chief economist at High Frequency Economics does not believe the Fed would go for a 50-basis point rate cut at the upcoming meeting. “We’re not seeing anything that I can imagine, in the data, that’s going to trigger the Fed to do what I would call a panicked 50 basis point rate cut,” said Weinberg.

He added, “Here’s what I think is going to take to get the Fed to move by 50 basis points, it’s going to take a big uptick in initial claims for unemployment insurance, evidence of more layoffs occurring in the economy and a sharp drop off in hiring, perhaps down to zero.”

Meanwhile, for US stocks, growth now looks like a bigger worry than inflation. While the trajectory of price rise has been comforting, recession worries have popped up following two months of tepid employment numbers.

September Is Historically the Worst Month for US Stocks

Notably, September is historically the worst month for US stocks and the price action so far seems to suggest that 2024 won’t be much different. Incidentally, while the broader markets rose to record highs in the first half of 2024, the dismal returns of the Dow Jones Industrial Average Index and the divergence between tech and other sectors suggested underlying pain in the US economy.

Around 200 S&P 500 stocks were in the red in the first half of 2024 even as the index was up in double digits. There has been a divergence in the fortunes of tech stocks and other sectors of the economy some of which are facing severe slowdown.

Now, as incoming data points confirm the slowdown in the US economy, stocks are also repricing themselves as we saw this week.