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Stocks lose more ground on fears a recession may be looming

NEW YORK (AP) – Good news on the economy remains bad news for Wall Street, as stocks fell sharply on Friday on worries a still-strong United States (US) jobs market may actually make a recession more likely.

The S&P 500 ended 2.8 per cent lower after briefly dropping 3.3 per cent as traders weighed a government report showing employers hired more workers last month than economists expected. The Dow Jones Industrial Average fell 2.1 per cent and the Nasdaq composite lost 3.8 per cent.

Wall Street is worried the Federal Reserve (Fed) could see that as proof the economy has yet to slow enough to get inflation under control. That could clear the way for the Fed to continue hiking interest rates aggressively, something that risks causing a recession if done too severely.

“The employment situation is still good and that might be a little frustrating to the Fed,” said Senior Investment Strategist at Allspring Global Investments Brian Jacobsen. “The Fed thinks we need more people unemployed in order to make sure inflation comes down and stays down.”

Stocks have tumbled over 20 per cent from records this year on worries about inflation, interest rates and the possibility of a recession.

American flags fly outside the New York Stock Exchange in New York. PHOTO: AP

The major indexes managed to notch a gain for the week, thanks to a powerful but short-lived rally on Monday and Tuesday after some investors squinted hard enough at some weaker-than-expected economic data to suggest the Fed may take it easier on rate hikes. But Friday’s jobs report may have dashed such hopes for a “pivot” by the Fed. It’s a pattern that has been repeated several times this year.

“For a lot of this a year, there really has been a degree of false optimism among many investors that the Fed would would tap the brakes and pivot sooner than they’ve been telling us they will for quite some time,” Head of Capital Market research at US Bank Wealth Management Bill Merz.

“The market is increasingly coming to terms with, albeit gradually, that the Fed is highly unlikely to pivot in the near-term as some have been hoping for.”

Employers added 263,000 jobs last month. That’s a slowdown from the hiring pace of 315,000 in July, but it’s still more than the 250,000 that economists expected.

Also discouraging for investors was that the unemployment rate improved partly for the wrong reasons. Among people who aren’t working, fewer than usual are actively looking for jobs. That’s a continuation of a longstanding trend that could keep upward pressure on wages and inflation.

“We are not out of the woods yet, but should be getting closer as the impact of aggressive policy starts to take hold,” said Director of Research at Janus Henderson Investors Matt Peron. By hiking interest rates, the Fed is hoping to slow the economy and jobs market. The plan is to starve inflation of the purchases needed to keep prices rising even further.

The Fed has already seen some effects, with higher mortgage rates hurting the housing industry in particular. The risk is that if the Fed goes too far, it could squeeze the economy into a recession. In the meantime, higher rates push down on prices for stocks, cryptocurrencies and other investments.

“Everything hinges on inflation at this point,” said Head of Portfolio Management for Commonwealth Financial Network Peter Essele. “We do think its going to moderate over the next few quarters.”

Altogether, many investors see Friday’s jobs data keeping the Fed on track to hike its overnight rate by three-quarters of a percentage point next month. It would be the fourth such increase, which is triple the usual amount, and bring the rate up to a range of 3.75 per cent to four per cent. It started the year at virtually zero.

Crude oil, meanwhile, had its biggest weekly gain since March. Benchmark US crude jumped 4.7 per cent to settle at USD92.64 per barrel on Friday. Brent crude, the international standard, rose 3.7 per cent to settle at USD97.92.

They’ve shot higher because big oil-producing countries have pledged to cut production in order to keep prices up. That should keep the pressure up on inflation, which is still near a four-decade high but hopefully moderating.

The rise for crude helped stocks of oil-related companies to be among Wall Street’s very few to rise on Friday. Oilfield services provider Halliburton climbed two per cent.

Stocks of technology companies led the way in the opposite direction. They’ve been among the hardest hit by this year’s rising rates, which most hurt investments seen as the riskiest, most expensive or having to make investors wait the longest for big growth.

Microsoft slumped 5.1 per cent, and Amazon fell 4.8 per cent.

All told, more than 90 per cent of stocks in the S&P 500 closed lower on Friday. The index fell 104.86 points to 3,639.66. It ended with a 1.5 per cent gain for the week, its first weekly gain in four weeks.

The Dow dropped 630.15 points to 29,296.79, while the Nasdaq lost 420.91 points to close at 10,652.40.

Smaller company stocks also gave up more ground. The Russell 2000 index fell 50.36 points, or 2.9 per cent, at 1,702.15.

Beyond higher interest rates, analysts said the next hammer to hit stocks could be a potential drop in corporate profits. Companies are contending with high inflation and interest rates eating into their earnings, while the economy slows.

Advanced Micro Devices (AMD) fell 13.9 per cent after it warned revenue for its latest quarter is likely to come in at USD5.6 billion, below its prior forecasted range of USD6.5 billion to USD6.9 billion. AMD said the market for personal computers weakened significantly during the quarter, hurting its sales.

Levi Strauss fell 11.7 per cent after it cut its financial forecast for its fiscal year. It cited the surging value of the US dollar against other currencies, which weakens the dollar value of sales made abroad, as well as a more cautious outlook on economies across North America and Europe.

Treasury yields rose immediately after the jobs report’s release, though they wobbled a bit afterward. The yield on the 10-year Treasury, which helps set rates for mortgages and other loans, climbed to 3.88 per cent from 3.83 per cent late on Thursday.

The two-year yield, which more closely tracks expectations for Fed action, rose to 4.30 per cent from 4.26 per cent. Earlier in the morning, it climbed above 4.33 per cent and was near its highest level since 2007.

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