US stocks plunged on Friday as fresh concerns about a potential recession emerged following a disappointing jobs report. The Dow Jones Industrial Average dropped more than 900 points in morning trading, while the S&P 500 declined by 2.37%, and the Nasdaq Composite fell by 3.14%, officially entering correction territory with a 10% loss from its recent record high.
The downturn in the stock market was accompanied by a rise in the price of gold, which climbed 1.30% to $2,513.00 per ounce, reflecting investors’ shift towards safe-haven assets.
The sell-off was triggered by a weaker-than-expected jobs report from the US Labour Department. The report showed that the economy added 114,000 jobs in July, down from 179,000 in June and significantly below economists’ expectations of 185,000. Additionally, the unemployment rate unexpectedly rose to 4.3%, the highest level since October 2021.
“Job creation in the US fell short of expectations for the first time in months, signalling a potential slowing of economic growth,” noted Mahmoud Alkudsi, a senior market analyst at ADSS.
The rise in the unemployment rate also activated the Sahm Rule indicator, which suggests that a recession is imminent if the three-month average unemployment rate increases by half a percentage point from its lowest point in the past 12 months.
Wells Fargo economists Sarah House and Michael Pugliese highlighted the increase in job losses over the past year, warning of a genuine weakening in labor market conditions that could heighten the risk of a recession.
Federal Reserve Chair Jerome Powell addressed the Sahm Rule earlier this week, referring to it as a “statistical regularity” rather than an economic certainty. He emphasized that the Fed is monitoring the labor market closely and is prepared to respond if conditions worsen.
On Wednesday, the Federal Reserve decided to keep its target range for interest rates unchanged at 5.25% to 5.50%. However, Powell hinted at the possibility of a rate cut in September, despite some members of the Federal Open Market Committee preferring to maintain current rates.
Market sentiment has shifted towards expecting a September rate cut, with 62.5% of traders anticipating a 50 basis point reduction, according to the CME FedWatch tool. Nonetheless, some analysts, such as those at LHMeyer, caution that while a rate cut seems likely, the Fed may not move as aggressively as the market predicts unless the economic outlook deteriorates further.
As inflation has eased, the Federal Reserve now has more flexibility to focus on supporting employment. However, concerns persist that the Fed might maintain higher interest rates for too long, potentially undermining its goal of achieving a “soft landing”—taming inflation without triggering a recession or significantly increasing unemployment.
“I would not like to see material further cooling in the labor market,” Powell remarked, reflecting the delicate balance the Fed aims to strike.
Friday’s steep losses followed a similarly rough session on Thursday, where the Dow and S&P 500 each fell by over 1% after a weak ISM manufacturing report added to fears that the Federal Reserve might be too slow in adjusting interest rates.