Sharp Decline in Major Indexes Amid Economic Worries

US stocks took a severe hit on Friday, as a weak July jobs report fueled investor fears and raised the likelihood of a more aggressive rate cut by the Federal Reserve. The S&P 500 fell over 3% in a two-day sell-off, while the Nasdaq Composite officially entered correction territory, falling 10% below its July peak.

The surge in the CBOE Volatility Index (VIX) by 60% to 29.66, the highest level since March 2023, underscored the growing panic among investors.

Bond Market Reacts to Economic Data

The bond market mirrored the turmoil, with the 10-year US Treasury yield dropping 18 basis points to 3.79%, its lowest level this year. This movement reflected heightened concerns about the economic outlook and the potential need for more significant monetary intervention.

Disappointing Earnings Compound Market Woes

Adding to the market's woes were lackluster earnings reports from tech giants Amazon and Intel, which set a negative tone for Friday's trading. The disappointing July jobs report, revealing an unexpected rise in the unemployment rate and lower-than-expected payroll figures, further exacerbated the situation. This report also triggered the Sahm rule, a key recession indicator.

Shift in Fed Rate Cut Expectations

The weak economic data significantly altered expectations for the Federal Reserve's next move. The probability of a 50-basis point rate cut at the upcoming September FOMC meeting soared to 72%, a substantial increase from the previous day's 22%, according to the CME Fed Watch Tool. Market sentiment has swiftly shifted from anticipating a 25-basis point cut to a more aggressive reduction, with increased pressure on the Fed to accelerate rate cuts through the end of the year.

“Market moves on Thursday pointed to investor concerns that the US economy is cooling too quickly and may require further support from the Fed,” stated Solita Marcelli, Americas CIO at UBS Global Wealth Management.

Signs of Panic and Fear

The significant rise in the VIX and other sentiment indicators like CNN's Fear & Greed Index, which plunged 18 points to 27, highlighted the escalating fear among investors. “That is a sign of fear and panic. That is something we would want to see near the lows,” noted Tom Lee of Fundstrat.

Here's where US indexes stood at the 4:00 p.m. closing bell on Friday:

• S&P 500: 5,346.56, down 1.8%
• Dow Jones Industrial Average: 39,737.26, down 1.5% (611 points)
• Nasdaq Composite: 16,776.16, down 2.4%

The convergence of weak jobs data, disappointing corporate earnings, and shifting expectations for Federal Reserve policy has created a perfect storm of uncertainty and volatility, leading to a sharp sell-off in the US stock market. Investors are now closely watching the Fed's next moves, which could be critical in stabilizing the market and the broader economy.