Economic Anxiety Triggers Wall Street Sell-Off
Just weeks ago, the U.S. stock market was humming. The three major stock market indexes were all trading at, or near, their all-time highs. Investors were celebrating their gains and filled with a hopeful optimism for the remainder of the year.
But in the three trading days from Thursday, Aug. 1 through Monday, Aug. 5, the U.S. stock market experienced a sharp and sudden sell-off that left investors catching their breath. In those three days, the S&P 500 fell 6.1% while the Dow Jones Industrial Average lost 5.2%. The tech-heavy NASDAQ fared the worst, falling 8%. At the end of Monday’s trading session, the NASDAQ was down 13.1% from its recent all-time high set just three weeks earlier. So, what caused this big three-day sell-off in the stock market?
Wall Street is currently in the heart of the latest earnings season where companies are reporting their financial results for the April-June second quarter. What they’re seeing is one company after another lower their revenue and/or profit forecasts for the second half of the year. And these are some big-name companies, such as PepsiCo, UPS, Amazon, Hyatt and Honeywell, among many others.
One of the common themes we’re hearing from all these companies is a weakening of the American consumer. They contend that years of high inflation and high interest rates are starting to take a visible toll on consumer spending. As consumer spending falls, so typically do corporate earnings and profits. But the broader American economy is also impacted. Consumer spending is the main driver of our economy and accounts for more than two-thirds of our nation’s total economic growth.
The stock market sell-off was further fueled by a very disappointing July Employment Report released the morning of Friday, Aug. 2. The Department of Labor reported the national unemployment rate jumped from 4.1% to a three-year high of 4.3%. 12 months ago, the rate was at 3.5%. In July, only 114,000 new jobs were added, far below the 180,000 that Wall Street had forecast. It was one of the lowest monthly job gains in nearly four years. The monthly gains previously reported in May and June were also revised lower by a combined 29,000 jobs. Furthermore, annual wage growth fell to a three-year low.
The July Employment Report reinforced Wall Street’s concern of a cooling labor market. The number of job openings across the nation is at 8.18 million, near a three and a half year low. This is down 941,000 from 12 months ago and down four million from the peak of 12.18 million reported in March 2022.
Until recently, the general consensus on Wall Street was that the U.S. economy would slowly and gradually weaken in the second half of the year. But over the past few weeks, that narrative has quickly changed. A steady stream of companies lowering their revenue and profit forecasts, combined with a very disappointing July Employment Report, has Wall Street concerned of a much more severe economic pullback than originally forecast. It’s also heightened fears of a recession. All that apprehension and anxiety was reflected in the three-day stock market sell-off.
But where does this leave investors? It’s going to take some time to fully figure out just how severe any economic decline in the second half of the year might be. But that clarity might not be reached for a couple more months until more economic data comes out and is analyzed. In the meantime, that may likely lead to a lot more volatility and choppiness in the stock market as we try to figure that answer out.
Mark M. Grywacheski, Investment Advisor
Quad Cities Investment Group is a Registered Investment Adviser.
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