On September 3, 2024, U.S. stocks experienced their steepest decline since early August, as investors grew anxious over the upcoming economic data. The market sentiment turned negative, reflecting broader concerns about a global economic slowdown. The S&P 500 dropped 2.1%, erasing part of its gains from the previous three-week rally that nearly pushed it to an all-time high. The Dow Jones Industrial Average fell 626 points, or 1.5%, while the Nasdaq Composite plummeted 3.3%, with Nvidia and other tech giants leading the losses.
This downturn in the stock market wasn’t just due to domestic factors—global economic challenges played a significant role in amplifying investor fears. As uncertainty surrounding the Federal Reserve’s future monetary policy and the global economic outlook grew, markets began to waver.
Manufacturing Contraction and Bond Market Decline
Treasury yields also declined, reflecting broader market unease. A recent economic report revealed that U.S. manufacturing contracted again in August, continuing a trend that has persisted for many months. High interest rates have been a significant burden on the manufacturing sector, and August’s performance fell short of economists’ expectations.
Timothy Fiore, chair of the Institute for Supply Management’s Manufacturing Business Survey Committee, noted, "Demand remains subdued as companies are reluctant to invest in capital and inventory due to current federal monetary policy and uncertainty surrounding the upcoming elections."
This uncertainty has shaken market confidence, leading to simultaneous declines in both stocks and bonds. Although the Federal Reserve had previously taken an aggressive approach by raising interest rates to combat inflation, this move has driven rates to their highest levels in two decades, further dampening business investment and consumer demand.
Energy Stocks Lead the Decline as Oil Prices Plummet
Energy stocks were among the hardest hit, reflecting growing concerns about future oil demand in a weakening global economy. The price of U.S. benchmark crude oil dropped nearly 4%, falling back to around $70 per barrel, down from its April high of over $85. This decline in oil prices has pressured energy companies, with Exxon Mobil shares down 2.1% and ConocoPhillips dropping 3.5%.
The global economic slowdown suggests that future oil demand may continue to weaken. Despite a brief rally in the energy market earlier this year, the combination of slowing economic growth and weakening consumer confidence has once again pushed the oil market into a slump.
The Fed’s Dilemma: Balancing Recession Risks with Rate Cuts
In early August, concerns about a U.S. economic slowdown and the possibility of a recession led to a sharp drop in the stock market. The S&P 500 came close to entering a correction, falling nearly 10% from its July peak. However, the market quickly rebounded, largely due to investor optimism that the Federal Reserve could engineer a “soft landing”—curbing inflation without triggering a severe recession.
The Federal Reserve is now expected to lower interest rates later this month in an effort to ease economic conditions and stave off a recession. Previously, the Fed had aggressively raised rates to their highest level in two decades to fight high inflation. With economic growth slowing and the labor market showing signs of weakness, the Fed is now hoping that gradual rate cuts can alleviate economic pressures. However, investors remain skeptical about the Fed's ability to achieve this delicate balance.
Several key economic reports due later this week could provide further insight into the economy’s needs. These include updates on the number of job openings at the end of July and the performance of the U.S. services sector in August. The most anticipated report, however, will be Friday’s employment data for August, which will reveal how many jobs were added last month.
According to analysts at Bank of America, the jobs report has become the primary monthly focus for the stock market, replacing inflation updates. Many traders anticipate that the Fed will cut interest rates by a full percentage point this year, a move typically associated with recessionary conditions. The report from Bank of America’s Global Research team, led by economist Gonzalo Asis, suggests that the market is bracing for such a “recession-sized” rate cut.
Market Reaction and Fed Policy Outlook
Goldman Sachs economist David Mericle has highlighted that Friday’s jobs report will be crucial in determining the size of the Fed’s next rate cut. If the data shows stronger job growth compared to July’s disappointing numbers, the Fed might opt for a standard quarter-point rate cut. However, if the report shows further weakening, it could prompt the Fed to implement a more significant half-point cut.
While rate cuts generally boost investment markets, the potential for an economic recession could offset these benefits by reducing corporate profits. Investors are closely monitoring the economic data in the coming months to gauge the Fed's policy direction.
Nvidia Leads Tech Stocks in a Broad Market Sell-Off
Among the hardest-hit sectors in Tuesday’s sell-off was technology, with Nvidia bearing the brunt of the decline. The chipmaker’s stock plunged 9.5%, making it the heaviest drag on the S&P 500. Despite exceeding expectations in its recent earnings report, Nvidia’s stock has struggled, reflecting concerns that the hype around artificial intelligence (AI) may have inflated the stock’s valuation too much.
The so-called “Magnificent Seven” tech companies, which dominated the S&P 500’s returns last year and earlier this year, all saw their stocks drop by at least 1.3% in Tuesday’s trading.
Mixed Performance as Some Sectors Resist the Downtrend
Despite the overall downtrend, not all stocks were dragged into the red. About 30% of the S&P 500’s stocks managed to post gains, particularly those that stand to benefit the most from lower interest rates. These included dividend-paying companies and those whose profits are less sensitive to economic cycles, such as real estate firms and consumer goods manufacturers.
In summary, the S&P 500 dropped 119.47 points to close at 5,528.93, the Dow Jones Industrial Average fell 626.15 points to 40,936.93, and the Nasdaq Composite declined 577.33 points to 17,136.30. In the bond market, the yield on the 10-year Treasury note fell to 3.84% from 3.91% on Friday, down significantly from the 4.70% seen in late April.
International Markets Under Pressure Amid China Concerns
International stock markets also faced pressure, with major indices across Europe and Asia closing lower. Growing concerns about the resilience of China’s economy further weighed on global sentiment. Recent data from China painted a mixed picture, and weak earnings reports from Chinese companies, including property developer New World Development Co., added to the pessimism.
China’s economic slowdown has significant global implications, affecting supply chains and investment climates worldwide. As the world’s second-largest economy, China’s performance directly influences global trade and market sentiment. The ongoing struggles in China’s real estate market and the slowdown in manufacturing have prompted global investors to reassess the long-term prospects of the Chinese market, adding to the downward pressure on global stocks.
Conclusion
Tuesday’s sharp decline in U.S. stocks underscores widespread investor concerns about the global economic outlook. The Federal Reserve’s policy decisions, upcoming U.S. economic data, and the performance of China’s economy are all key factors driving market volatility. While the anticipation of rate cuts provided some support to certain sectors, the overarching fear of a recession keeps the market on edge. Investors will continue to closely monitor economic data in the coming weeks to determine the future trajectory of the market and the potential actions of the Federal Reserve.
In such a complex and volatile market environment, investors need to proceed with caution and remain vigilant about the changing global economic landscape and monetary policy shifts.