Fear Has Entered the Market, but Is it a Head Fake?
The market started off the historically-weakest month of the year with a deep decline.
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It was not the best start to a new trading month, to understate things.
Investors couldn't be blamed for a feeling a bit of "deja vu" on Tuesday as equities opened September with an over 3.2% decline in the NASDAQ while the S&P 500 fell a tad more than 2.1%. This was both indexes' biggest one-day declines since August 5, 2024. The VIX also spiked to just over the 20 level. Not exactly the same magnitude of the move to just over 60 four weeks ago for a nanosecond, but still a sign that some fear is creeping into the market.
And there are certainly concerns that investors should have right now. Oil fell over $3 a barrel to give up all its gains for 2024. Copper was also off 3% as Goldman Sachs slashed its average 2025 forecast by some $5,000 a ton on renewed worries around growing economic weakness in China. The air continued to come out of AI-related stocks as NVIDIA Corporation NVDA dropped by more than 9% on Tuesday. The Philadelphia Semiconductor Index (SOX) collapsed by 8% in its worst daily performance since 2020.
Unlike many down days in June and July, there was no sector rotation into small caps as the Russell 2000 moved down by more than 3% on Tuesday as well. The Boeing Company BA was downgraded by Wells Fargo on long-term cash flow concerns and fell over 7% on the day. This contributed to the better than 625-point plunge on the Dow on Tuesday. Manufacturing continues to be weak as the August U.S. Manufacturing PMI came in at a weaker-than-expected 47.9 reading, as that part of the economy remains in contractionary territory. Construction spending in July fell .3% on a month-over-month basis. A slight rise was expected.
The question is if this move is just a head fake that the opening of August turned out to be. September is the historically-weakest month of the year for stock market performance. Investors also cannot count on stronger-than-expected Q2 reports boosting equities like in August, as earnings season is all but over. In addition, the AI sector seems like it is at least in consolidation mode, and I don’t expect the Magnificent Seven to ride to the rescue either. Will new market leadership appear?
I think the August ADP jobs report this month will be more important than usual and could set the tone of the trading day, at least early. The BLS lost some creditability late in August with its massive downward revision of its original job growth projection between March 2023 and March 2024. In addition, the July BLS jobs report was abysmal. Investors need some reassurance that the jobs market deterioration we have seen in recent months is not accelerating. Poor jobs numbers this week could firmly put a 50 BPS rate cut on the table for the upcoming FOMC meeting. However, I don’t think that will be received as a positive for the market, as it would be a sign that the central bank is increasingly worried about the economy.
At the time of publication, Jensen had no positions in any securities mentioned.
