Economic worries are back on Wall Street’s radar after the jobs data

By Lewis Krauskopf and David Randall

NEW YORK (Reuters) – Uncertainty about the health of the U.S. economy is sweeping through markets, adding fuel to an already volatile period as investors grapple with a shift in Federal Reserve policy, a close U.S. election and worries about of extended assessments.

U.S. stocks fell on Friday after closely watched jobs data showed labor market momentum slowed more than expected, suggesting a narrower path for the U.S. to achieve a soft landing where the Fed is able to reduce inflation without significantly harming economic growth.

The Fed is expected to cut interest rates at its Sept. 17-18 meeting, but the data revived fears that months of high borrowing costs have already begun to weigh on the economy. That’s a potentially unwelcome development for investors after the prospect of interest rate cuts against a backdrop of resilient growth helped drive the S&P 500 to record highs this year.

“The data shows that we remain on the soft landing path, but clearly there are more downside risks that markets will be sensitive to,” said Angelo Kourkafas, senior investment strategist at Edward Jones. “Expectations for high volatility are realistic.”

Evidence of declining risk appetite has emerged in the markets. The S&P 500 fell 1.7 percent, with major decliners in technology and growth stocks among the market’s biggest gainers this year. Nvidia, this year’s poster child for artificial intelligence excitement, recently fell more than 4% to its lowest level in about a month.

Meanwhile, the Cboe market volatility index, also called Wall Street’s “fear gauge,” hit its highest level in nearly a month on Friday.

Several factors threaten to exacerbate market uncertainty. Although futures bets on how much the Fed will cut interest rates later this month showed investors a nearly 75 percent chance of a 25-basis-point cut, the issue remains far from resolved.

“Markets have had to grapple — as the Fed does — whether August’s payrolls data reflects a normalization of the labor market toward pre-Covid levels or whether it indicates an economy losing dangerous momentum,” Quincy Krosby, strategist global head for LPL. Financial said in a written comment.

Others had poorer vision. Citi analysts said the report warranted a 50 basis point cut later this month.

“The takeaway from the range of labor market data is clear – the labor market is cooling in a classic pre-recession pattern,” Citi analysts wrote.

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Next week’s inflation data could shed further light on the economy’s strength and help bolster bets on how much the Fed might cut rates.

Appraisal concerns also resurface. The S&P 500, which has risen more than 13% this year, is trading at a price-to-earnings ratio of nearly 21 times forward 12-month earnings estimates on Thursday, well above its historical average of 15.7, according to LSEG Datastream.

Despite a recent swoon, the S&P 500 technology sector — by far the largest group in the index — trades at more than 28 times expected earnings, compared with the long-term average of 21.2.

“We’ve come a long way in a relatively short period of time, and I think you’re starting to see some companies do the math with AI and wonder if it’s really worth the cost, which is going to weigh on big tech stocks.” said Mark Travis, portfolio manager at Intrepid Capital Management.

Investors are also closely watching the US presidential election, which is starting to draw to a close. The race between Democrat Kamala Harris and Republican Donald Trump could focus more on investors on Tuesday when the two candidates debate for the first time ahead of the Nov. 5 vote.

So far, market fluctuations have cemented September’s reputation as a tough time for investors. The S&P 500 fell an average of nearly 0.8 percent in September since 1945, its worst month for stocks, CFRA data showed. The index is already down 4% since the beginning of the month.

“Investors are saying let’s hope we can have a soft landing,” said Burns McKinney, senior portfolio manager at NFJ Investment Group. “It seems quite likely, but with each weaker jobs number, it becomes less and less of the base case.”

(Reporting by Lewis Krauskopf; Editing by Ira Iosebashvili and Richard Chang)