A softer-than-expected jobs report sparked concerns about whether the Federal Reserve will need to implement significant rate cuts at its upcoming meeting to keep the economy from plunging into recession, which led to the tech-heavy index falling about 3% on Friday.
A 10% drop from the Nasdaq Composite Index’s record high set in early July—a move that market players refer to as a “correction”—was anticipated on Friday due to concerns over tech earnings and a slowing U.S. economy.
A softer-than-expected jobs report sparked concerns about whether the Federal Reserve will need to implement significant rate cuts at its upcoming meeting to keep the economy from plunging into recession, which led to the tech-heavy index falling about 3% on Friday. Investors have also been alarmed by Amazon and Intel’s disappointing earnings.
Since July 10, when the Nasdaq closed at a record 18,647.45 points, it has decreased by 10.4%. When an index or stock closes 10% or more below its previous record closing high, it is generally regarded as being in a correction.
Plumb Funds CEO and portfolio manager Tom Plumb stated, “This is an old-fashioned correction taking place.” “The economic narrative has shifted from one of growth to one of needing government intervention in the form of lower interest rates to stabilize the economy.”
A Reuters analysis of LSEG data shows that over the last 44 years, the index has entered correction territory after reaching a new high 24 times, or roughly every two years. The data indicated that a month after the index entered correction territory, it traded higher in two-thirds of these cases.
As of now, the Nasdaq has gained 12% on the year. This year, the S&P 500 has gained 12% as well, though it has dropped roughly 6% from its peak.
The decline in the Nasdaq is a result of investors growing more cautious about the expensive tech stocks that have driven the market higher for the majority of the year due to enthusiasm about the potential of artificial intelligence.
Additionally, stocks are about to enter what is usually a rocky season.
For US stocks, September and October are frequently erratic months. Based on LSEG data dating back to 1992, the average value of the Cboe Volatility index, which is Wall Street’s most widely used indicator of investor anxiety, is 21.8 in October, the highest of any month.
“This seasonality pattern is not unusual. Our August 2023 selloff was comparable, but maybe this one is stronger,” stated James St. Aubin, Chief Investment Officer of Ocean Park Asset Management.
“I would consider this to be the correction that many had anticipated seeing as summer approached. The market is getting uneasy because a lot of different things are piling on top of one another,” he stated.
Worries about stretched valuations were exacerbated last month by Alphabet and Tesla’s underwhelming results. Simultaneously, there might be worries that lower-than-expected outcomes are a sign of a more general softness in the economy.
“What earnings are saying about the economy as a whole is now the focus of the market, rather than just earnings,” stated in a note JJ Kinahan, CEO of IG North America and President of Tastytrade.
“Declining yields and rising bond prices are indicators that investors are looking for safe havens. All of that is a sign that the world economy is slowing down, which worries investors,” the speaker said.
