The stock market began September on a challenging note, with the S&P 500 experiencing its most significant drop since the sharp selloff in early August. Investors are increasingly cautious as they await crucial economic data that could influence the Federal Reserve’s upcoming decisions on interest rate cuts.
Wall Street traders pulled back on risk, leading to a 1.6% decline in the S&P 500. This downturn followed a strong rally that had brought the index close to its all-time highs. Notably, the technology sector, which has been a driving force behind market gains, saw a significant selloff. Nvidia Corp., a major player in the semiconductor industry, led the losses with an 8% decline. Additionally, energy stocks fell as oil prices erased their gains for the year. The volatility index, often referred to as the “fear gauge,” surged above 18, reflecting growing market anxiety.
With inflation relatively under control, the market’s focus has shifted to the health of the broader economy. Any signs of economic weakness could accelerate the Fed’s timeline for easing monetary policy. While interest rate cuts typically support equity markets, there is concern that the Fed’s actions might be a response to a deteriorating economic outlook, which could weigh on investor sentiment.
The upcoming jobs report on Friday is expected to be a critical factor in determining the size of the Fed’s initial rate cut. Analysts at BMO Capital Markets noted that the rise in the unemployment rate has left traders “on edge,” and the payroll data could be pivotal in deciding between a 25 or 50 basis-point reduction.
Callie Cox of Ritholtz Wealth Management pointed out that September is historically a challenging month for equities. However, she emphasized that the current market pullback might present a “buyable dip,” given the positive factors such as earnings growth, potential Fed easing, and the large amount of cash on the sidelines that could flow back into stocks.
The S&P 500 is approaching the 5,550 level, where significant options interest is set to expire later this month, making it a key level to monitor. The Nasdaq 100 also saw a substantial decline of 2.5%, while the Dow Jones Industrial Average fell 1.2%. Small-cap stocks, represented by the Russell 2000, dropped 2.7%. Boeing Co. was another notable loser, sliding 7.5% following an analyst downgrade.
In the bond market, 10-year Treasury yields fell five basis points to 3.85%. The corporate bond market is witnessing a surge in activity, with a record number of blue-chip firms issuing debt to take advantage of lower borrowing costs ahead of the US presidential election.
Investors are now anticipating a potential half-point rate cut by the Fed in one of its three remaining meetings this year. However, this expectation is contingent on the upcoming economic data, particularly the August jobs report. A strong payroll number could boost confidence in the resilience of the US economy, while a weaker report could reinforce concerns about an impending slowdown.
JPMorgan strategists have warned that even if the Fed begins cutting rates, the equity market rally may stall near record highs. They highlighted the risk that any policy easing could be “reactive” to slowing growth, rather than a proactive measure to sustain the current economic expansion.
September has historically been the worst month for the S&P 500 since 1950, and the current market environment suggests that investors should brace for continued volatility. With political and geopolitical uncertainties looming, along with the potential for further declines in bond yields, the market could face additional headwinds in the weeks ahead.
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