The stock market in the United States experienced a significant drop on Thursday, following a day of optimism fueled by hopes of an interest rate cut by the Federal Reserve. The S&P 500 sank 1.4% after a report revealed that U.S. manufacturing activity is still contracting and the pace of contraction is accelerating. This news, released by the Institute for Supply Management, reversed the gains that had been made earlier in the day.
The Dow Jones Industrial Average also took a hit, dropping 494 points, or 1.2%, with the Nasdaq composite falling 2.3%. The bond market saw a similar trend, with the yield on the 10-year Treasury dropping below 4%, back to levels last seen in February. This decline was influenced by reports showing an increase in the number of U.S. workers applying for jobless benefits and an improvement in worker productivity during the spring.
The weak economic data has raised concerns about the Federal Reserve potentially missing the window to cut interest rates before negatively impacting economic growth. While Fed Chair Jerome Powell hinted at a possible rate cut in September, the recent data suggests that the Fed may have kept rates too high for too long in an effort to combat inflation. This has made borrowing more expensive for consumers, affecting sectors like housing and automotive industries.
Stocks of companies closely tied to economic strength, such as energy and industrial companies, experienced sharp declines. The Russell 2000 index, which represents small-cap stocks, dropped 3%, reflecting concerns about the impact of high interest rates on the economy.
The upcoming employment report, expected to show a slight slowdown in U.S. hiring, is highly anticipated and could further influence market sentiment. However, the effects of Hurricane Beryl may skew the data, leading to a headline number that may not accurately reflect underlying economic fundamentals.
In the technology sector, Meta Platforms (formerly Facebook) stood out with a 4.8% increase in stock price after reporting better-than-expected profits and revenue. Other tech companies, like ARM Holdings, saw their U.S.-listed shares tumble despite positive financial results, as investors remain cautious about high valuations and profit expectations.
Overall, the S&P 500 fell 75.62 points to 5,446.68, the Dow dropped 494.82 to 40,347.97, and the Nasdaq tumbled 405.25 to 17,194.15. Traders are anticipating a rate cut by the Federal Reserve in September, with uncertainty surrounding the number of cuts expected in the near future.
Internationally, the Bank of England cut interest rates for the first time since the onset of the COVID-19 pandemic, while stock markets in Europe and Asia also experienced declines. The Nikkei 225 in Japan fell 2.5% following the Bank of Japan’s decision to raise interest rates, impacting the value of the yen and the profits of exporters like Toyota.
In conclusion, the recent market volatility reflects concerns about the impact of high interest rates on economic growth and the potential for rate cuts by central banks to stimulate the economy. Investors are closely monitoring economic data and central bank decisions to gauge the future direction of the markets.