Wall Street falls sharply to close its worst week in nearly 18 months

Another rout hit Wall Street Friday, with formerly high-flying technology stocks again taking the brunt, after a highly anticipated update on the US job market came in weak enough to add to worries about the economy.

The S& P 500 dropped 1.7 per cent to close out its worst week since March 2023. Broadcom, Nvidia and other tech companies drove the market lower amid ongoing concerns that their prices soared too high in the boom around artificial intelligence, and they dragged the Nasdaq composite down by a market-leading 2.6 per cent.

The Dow Jones Industrial Average dropped 410 points, or 1 per cent, after erasing a morning gain of 250 points.

Sharp swings also hit the bond market, where Treasury yields tumbled, recovered and then fell again after the jobs report showed US employers hired fewer workers in August than economists expected. It was billed as the most important jobs report of the year, and it showed a second straight month where hiring came in below forecasts. It also followed recent reports showing weakness in manufacturing and some other areas in the economy.

Such a softening of the job market is actually just what the Federal Reserve and its chair, Jerome Powell, have been trying to get in order to stifle high inflation, "but only to a certain extent and the data is now testing Chair Powell's stated limits," said Scott Wren, senior global market strategist at Wells Fargo Investment Institute.

Friday's data raised questions about how much the Federal Reserve will cut its main interest rate by at its meeting later this month. The Fed is about to turn its focus more toward protecting the job market and preventing a recession after keeping the federal funds rate at a two-decade high for more than a year.

Cuts to interest rates can boost investment prices, but the worry on Wall Street is that the Fed may be moving too late. If a recession does hit, it would undercut corporate profits and erase the benefits from lower rates.

"All is not well with the labour market," said Brian Jacobsen, chief economist at Annex Wealth Management. "The Fed wanted the labour market to come into better balance, but any balancing act is unstable."

Still, the jobs report did include some encouraging data points. For one, the unemployment rate improved to 4.2 per cent from 4.3 per cent a month earlier. That was better than economists expected. And even if August's hiring was weaker than forecast, it was still better than July's pace.

Christopher Waller, a member of the Fed's board of governors, said in a speech after the jobs report's release that "I believe we should be data dependent, but not overreact to any data point, including the latest data."

"While the labour market has clearly cooled, based on the evidence I see, I do not believe the economy is in a recession or necessarily headed for one soon," he said.

While Waller said he thinks a "series of reductions" to rates is appropriate given that a slowing job market now looks like the bigger threat for the economy than high inflation, he said the ultimate pace and depth of those cuts is still to be determined.

All the uncertainty sent Treasury yields on a wild ride in the bond market as traders tried to handicap the Fed's next moves.

The two-year Treasury yield initially fell as low as 3.64 per cent after the release of the jobs report, before quickly climbing back above 3.76 per cent. It then dropped back to 3.66 per cent following Waller's comments, down from 3.74 per cent late Thursday.

Wells Fargo Investment Institute's Wren said he was surprised by the size of markets' swings. While data has clearly shown a slowdown in the economy, he's still forecasting growth to continue, "and it's not the end of the world". He cautioned investors against panicking and selling their investments in knee-jerk reactions.

Despite its dismal week, the S& P 500 remains just 4.6 per cent below its all-time high set in July. It's also still up 13.4 per cent for 2024 so far, which counts as a good year.

A big reason for Friday's sharp drops was weakness for some big tech stocks that had been benefiting from the AI boom.

Broadcom tumbled 10.4 per cent despite reporting profit and revenue for the latest quarter that were above analysts' forecasts, thanks in part to AI. The chip company said it expects to make USD 14 billion in revenue this quarter, which was slightly below analysts' expectations of USD 14.11 billion, according to FactSet. Its stock sank 15.9 per cent for the week.

Other chip companies also fell Friday, including a 4.1 per cent drop for Nvidia. After soaring earlier this year as its revenue surged on the AI frenzy, Nvidia's stock has been shaky since mid-July as investors question whether they took it too high. Because of its massive size, Nvidia's stock is one of the most influential on Wall Street, and it fell 13.9 per cent over the week. That's even though Nvidia has continued to top analysts' expectations for growth.

On the winning side of Wall Street was US Steel, which rose 4.3 per cent after the CEO of rival Cleveland Cliffs told MSNBC that his company would still be interested in acquiring US Steel if the White House were to block its proposed sale to Japan's Nippon Steel.

All told, the S&P 500 fell 94.99 points to 5,408.42. The Dow dropped 410.34 to 40,345.41, and the Nasdaq composite lost 436.83 to 16,690.83.

In stock markets abroad, indexes fell across much of Europe and Asia. Trading was halted in Hong Kong because of a typhoon.