September is historically a tough one for equities, and the month's first day of trading didn't disappoint. A couple of downbeat readings on manufacturing activity fueled anxiety about the strength of the economic expansion, in turn sparking a flight from the bull market's mega-cap tech titans into more defensive sectors.
Market participants entered a historically tough two-month stretch for stocks by looking ahead to this week's packed economic calendar. Reports on labor openings and turnover, factory orders and, most important, the jobs report on Friday will all have implications for the next Fed meeting.
Recall that market participants are desperate for the Federal Reserve to begin cutting interest rates because lower rates equal higher future returns for stocks. The fact that the short-term federal funds rate, set by the Federal Open Market Committee (FOMC), is currently at a 23-year high is hardly ideal for equities.
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And yet a resilient labor market – and the wage growth that comes with it – has the Fed worried about rushing into rate cuts. Cut too soon, with a healthy economy and labor market as the backdrop, and inflation could accelerate again, the thinking goes.
Ultimately, the FOMC is trying to engineer what's known as a soft landing. That's where the central bank gets inflation back down to its long-term target of 2% without sparking a recession that throws millions of folks out of work.
Unfortunately, Tuesday's economic reports didn't bolster the case for the soft landing.
Econ data disappoints
"The September blues are hitting Wall Street today as investors embrace risk-off postures considering four consecutive years in which the back-to-school month has dished out equity losses," writes José Torres, senior economist at Interactive Brokers. "The economic calendar failed to support market bulls, with worse-than-projected contractions from ISM-Manufacturing and the Census's Construction Spending reports."
Indeed, manufacturing activity contracted for a fourth consecutive month in August, according to the Purchasing Managers' Index (PMI) from the Institute for Supply Management (ISM). "Sluggish ordering activity, employment, production and inventories all arrived beneath the contraction-expansion threshold of 50," Torres notes. "Despite softening demand and hiring, cost pressures didn’t cooperate."
Meanwhile, bulldozers dozed last month, as U.S. construction spending weakened in July, the Census Bureau reported. "Elevated financing costs and stretched affordability took a bite from residential and commercial activity," notes Torres.
As much as macroeconomics and monetary policy will be in focus this week, traders will still have to key on late-season corporate reports. The earnings calendar ranges from consumer staples names offering insights into the state of consumer spending to tech giant Broadcom (AVGO).
By Tuesday's close, the Mag 7 stocks that have done the majority of the bull market's heavy lifting were deeply in the red, dragging the main indexes with them. The blue-chip Dow Jones Industrial Average declined 1.5% to 40,936, while the broader S&P 500 fell 2.1% to 5,528. The tech-heavy Nasdaq Composite tumbled 3.3% to close at 17,136.
Nvidia taketh away
Nvidia (NVDA) is the most influential stock in the market these days thanks to its multitrillion-dollar market cap and its near-monopoly in making the semiconductors that power the servers that operate generative artificial intelligence/large language models. Its customers are the other members of the Magnificent 7, a collection of monopolistic AI plays.
You can see why everything looks great for NVDA these days. And, indeed, few stocks have done more for long-term shareholders than Nvidia. If you put $1,000 into NVDA stock 20 years ago, you would be gobsmacked by your returns.
Nvidia's market-beating ways actually go all the way back to its origins as a company that made graphics cards for gamers – and it has always done so with outsized volatility. That's how this works. The greater the reward, the greater the risk. There is no free lunch.
True, Nvidia lost 9.5% on Tuesday, shedding $279 billion in market value in the process. That's more than the entire market cap of Chevron (CVX), the only energy stock in the Dow Jones. Is this shocking? Not really. Volatility is the price longtime Nvidia shareholders have always paid for the stock's outsized rewards.
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