Plunging Dow by 542 Points due to Weak Employment Data: Current Stock Market Scenario
The U.S. stock market experienced a mixed performance on Friday, with some indices poised to open lower following President Donald Trump's announcements about new tariffs. Notably, the S&P 500 Index and the Nasdaq Composite closed down 1.6% and 2.2% respectively, moving further away from their all-time closing highs.
Consumer discretionary stocks, anchored by Amazon, sank the most among the sectors on Friday. The unemployment rate also increased from 4.1% to 4.2% in July, according to the Bureau of Labor Statistics. However, the weaker-than-expected July jobs report boosted the odds of a 25-basis-point move after the next Fed meeting from 37.7% to 80.8%.
The U.S. economy added 73,000 jobs last month, which is lower than a FactSet-compiled median estimate of 115,000. This substantial slowdown has prompted markets to sharply increase odds of a September Fed rate cut to around 80%, up from 40% previously.
Investors looking to invest ahead of a potential U.S. Federal Reserve interest rate cut this fall might consider increasing exposure to rate-sensitive assets such as U.S. Treasuries, high-quality bonds, and sectors that benefit from lower borrowing costs like real estate and utilities. Conversely, consider reducing holdings in cash or short-term money market instruments that yield less in a declining rate environment.
The context for a rate cut is supported by several insights. Goldman Sachs Research forecasted that the Federal Reserve might initiate rate cuts starting in September 2025, with multiple 25-basis-point cuts through the remainder of the year and into 2026. Bond market reactions have been mixed, but the recent jobs report has shifted sentiment sharply toward anticipating easing.
Investment strategies could include increasing allocation to U.S. Treasury bonds with medium to longer maturities to gain from yield declines. Adding high-grade corporate bonds or bond funds that benefit from rate cuts could also be considered. Real estate investment trusts (REITs) and utilities, which often outperform when interest rates decline, are another option. However, it's essential to monitor the inflation outlook since rate cuts hinge on both inflation dynamics and labor market conditions.
Given ongoing data releases and trade policy uncertainties, maintaining flexibility and a close watch on employment and inflation reports is essential. Avoid large positions until the Fed confirms its actions, but positioning now for a September cut aligns with current market expectations.
Meanwhile, UnitedHealth Group hit a new 52-week low on Friday. On the other hand, Figma (+5.4%) is holding and extending its immediate post-IPO gains. Reddit (+17.3%) posted double-digit beats on earnings and revenue and boosted guidance. However, Amazon.com was the worst performer among the 30 Dow Jones stocks on Friday. Energy was among the three worst sectors, with Chevron and Exxon Mobil retreating after both companies reported earnings before Friday's opening bell. Coinbase (-16.7%) beat on earnings but missed on revenue and gave back all its gains from its partnership with JPMorgan Chase (-2.4%).
Looking ahead, Berkshire Hathaway will post its second-quarter earnings at 8 a.m. ET on Saturday, August 7. May's total employment was revised from 144,000 to 19,000, and June's from 147,000 to 14,000. Morgan Stanley Wealth Management Chief Economic Strategist Ellen Zentner concluded that a Fed rate cut in September might be more probable.
- In light of the increasing odds of a September Fed rate cut and the potential benefits for rate-sensitive assets, some investors might consider increasing their exposure to cryptocurrency trading, as lower borrowing costs could boost the finance sector and increase investing in digital currencies.
- As the mixed performance of the U.S. stock market continues, with some indices poised to open lower and the unemployment rate increasing, businesses may find alternative avenues for investing, such as diversifying portfolios by including crypto and other digital currencies in their investment strategies.
