The close: Stocks slump in August kick-off as data reignites slowdown worries, sinking bond yields

North American stocks kicked off August sharply lower after a round of economic data on Thursday spurred concerns the US. economy may be slowing faster than anticipated while the Federal Reserve maintains a restrictive monetary policy. Benchmark U.S. Treasury yields fell the most this year.
Wall Street initially opened higher, buoyed in part by gains in Meta Platforms after its quarterly results topped expectations and the Facebook parent issued an upbeat outlook for the third quarter. Its shares closed 5.87% higher as the biggest boost to the S&P 500.
Early gains, however, evaporated after data showed a measure of U.S. manufacturing activity from the Institute for Supply Management (ISM) dropped to an eight-month low in July at 46.8, signifying contraction.
Other data showed the number of Americans filing new applications for unemployment benefits increased to an 11-month high last week, suggesting some softening in the labour market, although seasonal factors also played a role.
“It raises a genuine fear that the Fed is behind on cutting rates,” Lou Basenese, president and chief market strategist at MDB Capital in New York. “Few investors have confidence in the Fed sticking the proverbial soft landing and now the data is starting to support those concerns.”
In afternoon trading, the benchmark U.S. 10-year yield sank 12 basis points to 3.985%, on track for its largest daily fall since mid-December and at six-month lows. On the front end of the curve, the two-year yield, which reflects interest rate expectations, was down 15.1 bps at 4.173%.
Canadian bond yields were also lower, though not to the same degree. The Canadian 2-year yield was down about 6 basis points in late afternoon trading.
Nevertheless, money markets are also bracing for a sluggish economy in Canada. On Thursday, implied probabilities in swaps markets were pricing in nearly 100% odds that the Bank of Canada will cut interest rates again at its next policy meeting on Sept. 4. That’s up from about 70% odds just a week ago.
The Bank of Canada has so far cut interest rates this year by 50 basis points to 4.5%, and markets are now priced for between two to three more cuts to come this year.
On Friday, investors will eye the U.S. government payrolls report for any signs of further weakness in the labour market.
The S&P/TSX composite index ended down 387.60 points, or 1.7%, at 22,723.21, its biggest daily decline since Feb. 13. On Wednesday, the index posted a record closing high as the Fed signaled it could begin cutting interest rates in September
The Toronto market’s technology sector fell 3.4% and heavily weighted financials ended 1.6% lower.
Energy was down nearly 3% as the price of oil settled 2.1% lower at US$76.31 a barrel. Gold and copper prices also fell, with the materials group falling nearly 2% lower.
Real estate and utility sectors, which stand to benefit from lower interest rates, both rose modestly.
The Dow Jones Industrial Average fell 494.82 points, or 1.21%, to 40,347.97, the S&P 500 lost 75.62 points, or 1.37%, to 5,446.68 and the Nasdaq Composite lost 405.25 points, or 2.30%, to 17,194.15.
August is typically one of the weakest months of the year for stocks.
Both the S&P 500 and Nasdaq registered their biggest daily percentage gains since February in the prior session, boosted by a rally in chip shares after the Fed kept rates steady, as expected.
Defensive sectors such as utilities and real estate led gains on Wall Street as well.
Declines in megacap names such as Apple, down 1.68%, and Amazon, which lost 1.56% ahead of their quarterly results due after the closing bell weighed heavily on the tech and consumer discretionary indexes, which were among the worst performing of the 11 major S&P sectors.
After the closing bell, Amazon shares lost 4.47% following its quarterly results and outlook. Apple stock was slightly higher in post market trading after overall beating Street expectations.
Of the 342 companies in the S&P 500 that have reported earnings through Thursday morning, 79.2% have topped analyst expectations, according to LSEG data, slightly above the 79% beat rate over the past four quarters. The estimated earnings growth rate for the quarter is 13.3%, up from 10.6% on July 1.
The small-cap Russell 2000 slumped 3.03% for its biggest daily percentage drop since Feb. 13. Small caps have been volatile recently as investors rotate between cheaper names and more expensive stocks.
“Without a good economy, these economically sensitive small stocks just won’t do anything, even with rate cuts,” said Steve Sosnick, market strategist Interactive Brokers, Greenwich, Connecticut.
Nvidia dropped 6.67% in a broader chip stocks selloff sparked by Arm Holdings’ conservative revenue forecast and Qualcomm flagging a revenue hit from the impact of trade curbs. ARM shares plummeted 15.72% while Qualcomm stumbled 9.37% as the PHLX semiconductor index lost 7.14% for its biggest daily percentage drop since March 2020.
Moderna plunged 21.01% after cutting its 2024 sales forecast for COVID-19 and respiratory syncytial virus vaccines by up to 25%.
Eli Lilly rose 3.5% after trial results showed weight-loss drug Zepbound reduces the risk of hospitalization, death and other outcomes for obese adults with a common type of heart failure.
Declining issues outnumbered advancers by a 2.04-to-1 ratio on the NYSE and on the Nasdaq, declining issues outnumbered advancers by a 3.19-to-1 ratio.
The S&P 500 posted 54 new 52-week highs and seven new lows while the Nasdaq Composite recorded 65 new highs and 177 new lows.
Also see: Stocks seeing action on Thursday – and why
Reuters, Globe staff