The first trading week of September began poorly, similar to last month’s shaky start. Stock markets had a rough start in August but managed to regain their footing and close the month with gains. This time, we may be looking ahead to an even choppier month, as September is historically the weakest month for stock market returns. However, the widespread hope is that the Federal Reserve’s monetary easing will support the stock-market rally going forward.
As investors returned from the Labor Day holiday on Tuesday, they encountered the worst day for the stock markets since the crash on August 5th. Just as in early August, investor sentiment was hit by concerns over a slowing economy, as the ISM Manufacturing index reported a fifth straight monthly decline in manufacturing activity.
As markets went into a risk-off mode, the Technology sector was hit hardest. Nvidia’s (NVDA) plunge pulled down chipmakers, and the Nasdaq-100 (NDX) registered its worst start to September since 2002. Overall, nine of the eleven S&P 500 (SPX) sectors closed lower, with only the defensive Consumer Staples and Real Estate finishing in the green. However, this was not much of a sector rotation, as the blue-chip Dow Jones Industrial Average (DJIA) fell strongly on the day.
Markets tried to bounce back on Wednesday as investors braced for a slew of jobs data, which may help forecast the pace and size of the Federal Reserve’s rate decreases, which are expected to begin at its next meeting on September 17th. As a reminder, one of the main factors behind August’s flash crash was the apparent job market weakening, leading to recession worries.
The worries that the Fed may be doing too little, too late, resurfaced after Wednesday’s JOLTS report showed that job openings fell to their lowest level since 2021. Friday’s labor-market data is widely expected to confirm the downtrend in payroll growth. As a result of these concerns, stocks failed to regain ground, with only DJIA finishing the day slightly in the green.
Some economists say that the U.S. economy is well on its path to a recession, citing the Fed’s latest “Beige Book” report that reflected “flat or declining economic activity” across most regions in the country. However, the widespread consensus is that the U.S. economy is headed for a soft landing. Nonetheless, the stock market declines and the economic data led traders to price in larger and faster monetary easing than just a week ago.
While sentiment outside of some tech-stock pockets is not as fragile as it was in early August, weaker-than-expected payroll data on Friday may spark a deep market correction. It could also prompt policymakers to decrease interest rates by 0.5% in September and perform another half-percent cut later this year.
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