Wall Street tumbles on worries about the economy
US stocks tumbled Tuesday to their worst day since an early August sell-off, as a week full of updates on the economy got off to a discouragingly weak start.
The S&P 500 sank 2.1 per cent to give back a chunk of the gains from a three-week winning streak that had carried it to the cusp of its all-time high. The Dow Jones Industrial Average dropped 626 points, or 1.5 per cent, from its own record set on Friday before Monday’s Labour Day holiday. The Nasdaq composite fell 3.3 per cent as Nvidia and other “Big Tech” stocks led the way lower, according to reports on AP.
AP also reported that treasury yields stumbled in the bond market after a report showed US manufacturing shrank again in August, sputtering under the weight of high interest rates. Manufacturing has been contracting for most of the past two years, and its performance for August was worse than economists expected.
“Demand remains subdued as companies show an unwillingness to invest in capital and inventory due to current federal monetary policy and election uncertainty,” said Timothy Fiore, chair of the Institute for Supply Management’s manufacturing business survey committee, in the AP report.
It also pointed out that stocks of oil and gas companies were some of the market’s biggest losers after the price of crude oil fell roughly four per cent on concerns about how much fuel a fragile global economy will burn. A barrel of benchmark US oil is almost back to US$70 and down for the year, after climbing above US$85 in April.
There are similar worries about a slowing US economy, and a possible recession had helped send stocks on a scary summertime swoon in early August. It briefly knocked the S&P 500 nearly 10 per cent below its record set in July but financial markets quickly rebounded on hopes that the Federal Reserve could pull off a perfect landing for the economy.
The Fed appears set to lower interest rates later this month in hopes of easing conditions for the economy and avoiding a recession, after earlier jacking its main interest rate to a two-decade high to beat high inflation.
Other reports due later this week could show how much help the economy needs, including updates on the number of job openings US employers were advertising at the end of July and how strong US service businesses grew last month. The week’s highlight will likely arrive on Friday, when a report will show how many jobs US employers created during August.
The jobs report has once again become the main event for the stock market each month, taking over from updates on inflation according to analysts at Bank of America. Many traders are anticipating the Fed will deliver a full percentage point of cuts to interest rates this year, which is a “recession-sized” amount, Gonzalo Asis and other economists and strategists wrote in a BofA Global Research report.
The strength of this jobs report, or lack thereof, will likely determine the size of the Fed’s upcoming cut, according to Goldman Sachs economist David Mericle. If Friday’s data show an improvement in hiring over July’s disappointing report it could keep the Fed on course for a traditional-size move of a quarter of a percentage point.
But the AP report pointed out that if Friday’s report is weaker, it could drive the Fed to deliver an outsized cut of half a percentage point from the federal fund rate’s current range of 5.25 to 5.50 per cent, according to Mericle.
While cuts to rates are generally boons to investment prices, a recession could more than wipe out that benefit by dragging down corporate profits.
Worries were also growing about the resilience of China’s economy as recently disclosed data showed a mixed picture. Weak earnings reports from Chinese companies, including property developer and investor New World Development Co, added to the pessimism.