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Are you ready to face the music? Wall Street's main indexes took a nosedive to start August, as economic data released on Thursday reignited the specter of a recession looming on the horizon. The Dow Jones Industrial Average shed 1.2%, the S&P 500 lost nearly 1.4%, and the NASDAQ plunged a whopping 2.3%. But what's behind this sudden market turmoil?
Stocks initially opened higher, partly buoyed by Meta Platforms after the Facebook parent issued an optimistic outlook for the third quarter. Shares of Meta gained nearly 5%—but it was short-lived. The mood shifted southward as data revealed a measure of manufacturing activity from the Institute for Supply Management dropping to an 8-month low in July, signaling contraction. Additionally, the number of Americans filing new applications for unemployment benefits last week surged to an 11-month high. These signs of economic weakness are causing quite the stir.
Should the Federal Reserve have cut interest rates at the end of its policy meeting this week? Eric Dnton, president, and managing director of The Wealth Alliance, wonders aloud. "Careful what you wish for, my friend," he warns Jerome Powell. "You are fighting for the 2% inflation rate, but to get there, there's collateral damage—a slowing of the economy." He craves a soft landing—a scenario where the economy slows down, inflation drops, but we avoid a recession. However, the inverted yield curve, present for over 500 trading days, is one of the longest ever recorded and often precedes a recession. The markets are on edge, and profit-taking investors are eyeing every move.
But the story doesn't end there. What's next for the labor market? Investors are eagerly awaiting the non-farm payrolls report on Friday for any signs of further weakness. In the meantime, stocks are on the move. Amazon closed down 1.12% but experienced a deeper dive of 4.2% in after-hours trading after forecasting current quarter sales below estimates. Apple, which also ended about 1.5% lower, saw a rise after the closing bell due to stronger-than-expected revenue.
The semiconductor sector took a beating, with ARM Holdings and Qualcomm issuing conservative revenue forecasts, leading to a sell-off. ARM shares plummeted over 15.5%, while Qualcomm stumbled more than 9%. Nvidia also tumbled over 6.5%, resulting in the Philadelphia Semiconductor Index losing more than 7%—its biggest daily percentage drop since March 2020.
As we navigate these turbulent times, one thing is clear: the market's jittery, and the signals are pointing towards uncertainty. Will the Federal Reserve's tightrope walk lead to a soft landing, or are we heading towards a recession? The clock is ticking, and the answer may be just around the corner. Stay tuned.
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