Friday saw a dramatic decline in stocks following an unexpectedly weak jobs report for July, raising concerns that the economy might be slipping into a recession.
The broad market index took a hit, dropping 1.84% to close at 5,346.56. The Nasdaq Composite suffered a 2.43% loss, ending the day at 16,776.16, marking a decline of over 10% from its recent peak. The Dow Jones Industrial Average tumbled 610.71 points, or 1.51%, finishing at 39,737.26, after being down by as much as 989 points during the session.
This downturn came after data showed U.S. job growth in July slowed significantly more than anticipated, with the unemployment rate climbing to its highest level since October 2021. The Labor Department reported that nonfarm payrolls grew by just 114,000, down from 179,000 in June and below the 185,000 forecasted by economists surveyed by Dow Jones. The unemployment rate increased to 4.3%.
The yield on the 10-year Treasury fell to its lowest point since December as investors flocked to bonds, fearing that the Federal Reserve may have erred by maintaining interest rates at current levels.
Major tech stocks experienced sharp losses. Amazon’s disappointing second-quarter results heightened investor worries over substantial AI-related capital expenditures in the tech sector. The e-commerce titan plunged 8.8% after missing revenue expectations and providing a gloomy outlook. Intel saw a 26% drop following weak guidance and layoffs, while Nvidia fell 1.8%, adding to a 6% decline the previous day.
The Nasdaq is now the first of the three major indices to enter correction territory, having fallen more than 10% from its record high. The S&P 500 and the Dow are down 5.7% and 3.9% from their all-time highs, respectively. According to Adam Turnquist, LPL Financial’s chief technical strategist, Friday’s losses are part of the “natural course” of a bull market correcting after a steep ascent.
“The Nasdaq was extremely overbought heading into July, similar to semiconductors. Much of the AI hype hasn’t been grounded in reality yet,” Turnquist noted, emphasizing that this doesn’t mark the end of the AI narrative.
However, it wasn’t only technology stocks that took a hit on Friday. Bank stocks were also affected by recession fears, with Bank of America dropping 4.9% and Wells Fargo declining 6.4%.
This week has been volatile, with the S&P 500 swinging more than 1% in each of the last three trading sessions. The market had surged on Wednesday after the Fed signaled a potential rate cut in September. Yet, following Friday’s disappointing job numbers, many investors now believe the Fed should have acted sooner.
Despite indicators suggesting otherwise, Sahm Rule founder Claudia Sahm insists that the U.S. is not currently in a recession but acknowledges increasing risks.
“We are not in a recession now—contrary to the historical signal from the Sahm rule—but the momentum is moving in that direction,” Sahm, chief economist at New Century Advisors, explained via email. “A recession isn’t inevitable, and there’s significant room to cut interest rates.”
The Sahm Rule asserts that the economy is in a recession if the unemployment rate averages half a percentage point higher over three months than the 12-month low. In July, the jobless rate reached 4.3%, bringing the three-month average above 4.1%, compared to a 3.5% 12-month low.
However, Sahm recently noted on Substack that the rule might be overestimating labor market weakness due to unusual changes in labor supply caused by the pandemic and immigration.
“The Sahm rule is appropriately signaling caution about the labor market cooling, but the alarm is too loud,” she added.
