U.S. stocks fell for a third straight day, with the Dow Jones Industrial Average shedding more than 1,200 points, amid growing fears of an economic slowdown driven by a sharp slowdown in hiring and weakening consumer spending.
The S&P 500 index fell 199 points, or 3.7%, to 5,148 at the open, while the tech-heavy Nasdaq Composite dropped 4.6%. Investors are fleeing the big tech names that until recently have propelled the U.S. market higher: Apple and Meta both fell about 5% in early trading, while chipmaker Nvidia fell 10%.
The Dow Jones Industrial Average fell 1,238 points in early trading and was down more than 1,000 points, or 2.4%, as of 11:05 a.m. ET.
What causes panic among investors?
Stocks have started losing ground on Thursday after disappointing manufacturing and construction reports fueled fears that the U.S. economy may finally buckle under the pressure of high interest rates. Then, on Friday, government data showed that hiring last month was much lower than expectedadding to Wall Street fears that a “soft landing,” in which the U.S. economy might avoid a recession despite 23-year high interest rates, could instead turn into a hard landing.
“The main driver of resistance is the slowing economy,” Paul Christopher, Wells Fargo’s head of global investment strategy, wrote in a report. “Investors have watched household financial stress worsen over the past two years, but during that time, job growth has remained above its December 2009-December 2019 average of 180,000 new jobs per month.”
But Friday’s jobs report showed employers added just 114,000 new jobs last month, far fewer than the 175,000 jobs economists had expected, he noted.
Technology stocks have been hit particularly hard in recent weeks as investors shun artificial intelligence companies amid questions about when the emerging sector will generate profits.
“The last few weeks have been tough for the AI group as financial results have been released,” wrote analysts at Melius Research. “Microsoft, Meta, Google and Amazon have all been asked about the benefits of AI investments. While it’s pretty clear that they all need to keep spending, the market remains skeptical about their pace.”
The market rout spread to Asian and European markets, with Japan’s benchmark stock index plunging 12.4% on Monday. The Nikkei fell 5.8% on Friday, its worst two-day decline in history.
Stocks in Korea and Taiwan also fell sharply, with all three Asian markets hit by investors pulling back from AI-focused companies amid concerns the sector is overhyped.
European markets also opened lower on Monday, with Germany’s DAX down 2.3% at 17,267.00 points. The CAC 40 in Paris lost 1.9% to 7,114.33 points and the FTSE 100 in London fell 2.1% to 8,004.19 points.
Despite Monday’s rout, U.S. stocks remain in positive territory for the year. The S&P 500, for example, is up 9% year-to-date, even after factoring in the stock market’s three-day slide, while the Dow Jones Industrial Average is still up 3%.
When will the Fed cut rates?
Faced with the disappointing economic data, Wall Street is concerned that the Federal Reserve has kept its benchmark interest rate too high for too long, raising the risk of a recession. The central bank has held the federal funds rate steady unchanged at its meeting on July 31 to discuss economic conditions and whether and when it should begin cutting rates.
Lower interest rates would make it cheaper for U.S. households and businesses to borrow, but it may take time for the effects to be felt across the economy. On Monday, some investors called on the Fed to start cutting rates sooner rather than later to avoid an economic slowdown.
“The Federal Reserve must begin easing monetary policy more aggressively than previously anticipated to avoid an imminent recession in the world’s largest economy,” Nigel Green, CEO of deVere Group, an independent financial advisory and asset management firm, said in an email. “The Fed was late at the start of the cycle, it can’t afford to be late again.”
Economists still don’t expect a recession
Although concerns about the weakness of the U.S. economy and market volatility have spread around the world, domestic economic activity remains strong, with many analysts saying a recession remains unlikely. Stephen Brown, deputy chief North America economist at Capital Economics, still expects a soft landing, while acknowledging that the risk of a deeper recession is increasing.
The economy has accelerated this year, with the nation growing Gross domestic product jumps to 2.8% In the second quarter, expectations were exceeded. A recession is typically marked by two consecutive quarters of negative GDP. And while the July jobs report was disappointing, analysts point out that it only reflects one month of data, while noting that July’s depressed hiring numbers may also have been affected by Hurricane Beryl.
“It can be wrong to draw too broad conclusions from a single data release,” Solita Marcelli, chief investment officer for the 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 conditions, the number of displaced people rose to 436,000, compared to an average of 33,000 for the month of July since 2000.”
—With reporting from the Associated Press.
