MW The Dow is dropping. Is bad news on the economy no longer good news for stocks?
By William Watts
Selloff may just mark a 'buy the rumor, sell the fact' reaction to Fed rate-cut signal: strategist
A run of weaker-than-expected economic data got part of the blame for a Thursday selloff that has the Dow Jones Industrial Average on track for its biggest one-day fall since May.
In other words, bad news about the economy was bad news for stocks. That may sound logical, but it also seems to resolutely turn on its head the relationship between disappointing economic data and the stock market that's prevailed for much of the 2024 rally.
That relationship was one where disappointing news on the economic front was largely seen as good news for stocks because it reinforced the case for the Federal Reserve to begin cutting interest rates.
So what's changed? While the labor market by most metrics remains pretty robust, signs of cracks have emerged. Results and guidance from a host of consumer-oriented corporations has noted signs consumers, particularly those with lower incomes, are showing signs of stress.
While Federal Reserve Chair Jerome Powell signaled after the central bank's policy meeting Wednesday that a rate cut may finally be on the table in September if incoming economic data cooperates, some market watchers contend policymakers have waited too long to start easing.
"Because the Fed failed to move yesterday, the ongoing deterioration in the economic data as evidenced by today's rising initial jobless claims, low unit labor costs, and abrupt slowing in global manufacturing activity suggest that we are getting to a point where bad economic news is bad for markets," said Neil Dutta, head of economics at Renaissance Macro Research, in a note.
MarketWatch Live: 'Looks like the Fed made a boo-boo'
Economic data Thursday had a downbeat tone. First-time jobless claims for the week ended July 27 came in at their highest in nearly a year, though likely skewed by seasonal auto-plant closures. The stock-market selloff appeared to accelerate after the release of the Institute for Supply Management's July manufacturing index, which fell for a fourth straight month to 46.8% from 48.5% in June. Numbers below 50% signal the manufacturing sector is shrinking.
"Why is bad news bad again? Claims increased, ISM disappointed, [unit labor costs] underperformed, and stocks sold off. We'll argue that the macro narrative is in transition and the slower data hasn't reached the inflection point of deeply worrying," said Ian Lyngen, rates strategist at BMO Capital Markets in a note. "In short, it's bad, not bad enough."
Treasury yields dropped after the run of data, with the rate on the 10-year note BX:TMUBMUSD10Y dropping below 4% for the first time since Feb. 2. Yields move opposite to price.
See: Sinking Treasury yields signal growing jitters about `everything' ahead of Friday jobs report
The Dow Jones Industrial Average DJIA was down 554 points, or 1.4%, after declining more than 700 points at its session low, on track for its worst one-day performance since May. Cyclically sensitive stocks initially led the selloff, with tech later catching up to the downdraft.
Tech had bounced back sharply in Wednesday's session, but Thursday saw the tech-heavy Nasdaq Composite COMP slump 2.9% while the S&P 500 SPX saw broad losses, declining 1.9%. The small-cap Russell 2000 RUT, which surged in July as expectations for rate cuts and a resilient economy allowed that left-behind segment of the market play catch-up, was down 3.6%.
Not everyone was ready to declare a growth scare in effect, however.
Market participants have been clamoring for a Fed rate cut for over a year and Powell on Wednesday finally affirmed that one is likely on the way this fall, noted Kent Engelke, chief economic strategist at Capitol Securities Management.
Thursday's turn lower appeared to be more of a "buy on the rumor, sell on the fact" response, he said in a phone interview.
On top of that, tech stocks remain "priced for perfection" and so far results from megacap names have been largely disappointing, with the recent exception of Meta Platforms (META). If results from Amazon.com Inc. $(AMZN)$ and Apple Inc. $(AAPL)$ come up short, further weakness is likely ahead, he argued.
-William Watts
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
August 01, 2024 15:55 ET (19:55 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
Comments