Economic Concerns Resurface on Wall Street After Jobs Data, Reports Reuters

By Lewis Krauskopf and David Randall

NEW YORK – Concerns regarding the health of the U.S. economy are causing ripples in financial markets, exacerbating an already volatile climate. Investors are facing a shift in Federal Reserve policy, a tight U.S. election, and anxiety over high market valuations.

U.S. stocks fell sharply on Friday after job data indicated a more significant slowdown in the labor market than anticipated, which raises concerns about the feasibility of a soft landing for the economy. This scenario involves the Fed easing inflation without severely impacting growth.

Though the Fed is widely expected to reduce interest rates at its upcoming meeting, the latest data has reignited fears that prolonged high borrowing costs are beginning to weigh on the economy—an unwelcome prospect for investors who have seen stock prices reach record highs this year amid expectations of rate cuts and resilient growth.

"The data indicates we are still on a soft-landing trajectory, but there are increased risks that the markets will react to," said Angelo Kourkafas, a senior investment strategist at Edward Jones. "Expectations for heightened volatility are realistic."

The waning risk appetite was evident across various markets, with the S&P 500 dropping 1.7% on Friday and experiencing a nearly 4.3% decline over the past week—the index’s worst weekly performance since March 2023. Nvidia, a key player in this year’s artificial intelligence boom, saw its shares decline by over 4%, nearing a month-long low alongside other high-performing technology stocks.

Additionally, the Cboe Market Volatility Index, often referred to as Wall Street’s "fear gauge," reached its highest point in almost a month on the same day.

"There’s apprehension that the Fed may not act quickly or decisively enough to prevent a more severe downturn," noted Keith Lerner, co-chief investment officer at Truist Advisory Services.

Several factors contribute to the prevailing market uncertainty. Futures contracts indicated that investors were anticipating a nearly 70% likelihood of a 25-basis point reduction by the Fed, with a 30% chance of a 50-basis point cut. However, many believe the situation is still unsettled.

"Markets are wrestling with whether the recent payroll data indicates the labor market is returning to pre-COVID norms or if it signals a loss of vital momentum in the economy," stated Quincy Krosby, chief global strategist for LPL Financial.

Some analysts hold a more pessimistic view. Analysts at Citi believe the labor market data justifies a 50-basis point rate cut this month, suggesting, "The evidence from various labor market metrics is clear—the job market is cooling in a way that historically precedes recession."

Upcoming inflation data next week could further clarify the economic landscape and influence expectations regarding the Fed’s rate decisions.

Concerns about market valuations are also resurfacing. The S&P 500, up more than 13% this year, is currently trading at a price-to-earnings ratio of nearly 21 times expected forward 12-month earnings, significantly above its historical average of 15.7.

Despite recent declines, the technology sector of the S&P 500—its largest component—trades at over 28 times expected earnings, compared to a long-term average of 21.2.

"We have made substantial gains in a relatively short time, and companies are beginning to scrutinize the costs associated with AI, which could weigh heavily on large tech stocks," remarked Mark Travis, a portfolio manager at Intrepid Capital Management.

Investors are also keeping a close watch on the competitive U.S. presidential election, rapidly approaching its climax. The upcoming debate between Democrat Kamala Harris and Republican Donald Trump could draw significant investor attention ahead of the November 5 vote.

So far, the fluctuations in the market have reinforced September’s reputation as a challenging month for investors. Historically, the S&P 500 has declined by an average of nearly 0.8% in September since 1945, making it the worst month for stock performance. The index is already down 4% since the beginning of the month.

"Investors are hoping for a soft landing," said Burns McKinney, senior portfolio manager at NFJ Investment Group. "While it seems quite plausible, each disappointing jobs report diminishes that likelihood."