Don't Panic as the S&P 500 Tumbles

The panic was palpable on the social media platform X on Friday as the S&P 500 tumbled by as much as 2.7%.

A growing sense that a recession was on the horizon and that the Fed was dawdling permeated markets, causing investors to dump their stocks and pile into bonds.

The yield on the 10-year Treasury plunged by almost 20 basis points to as low as 3.79%, a level not seen in over seven months. 

Fed funds futures began pricing in a high likelihood of a 50-basis point rate cut at the Fed’s September meeting, while analysts at major investment banks forecast multiple half-point cuts this year and even the potential for an emergency cut before the next scheduled meeting. 

All that was based on a nonfarm payrolls report which showed that employers added 114,000 jobs in July, less than the 175,000 that economist were expecting.

Was it an overreaction? Probably.

While certainly disappointing, July’s job gains were still solidly in positive territory, and it was only last week that the government reported that GDP grew by 2.8% in the second quarter.

Employment Market Is Cooling

On the other hand, concerns about the labor market don’t stem just from Friday’s jobs report. The unemployment rate has risen for four straight months, and at 4.3%, it’s up notably from last year’s 3.4% trough. 

Worries about the economy, and particularly the labor market, are legitimate. And it’s fair to ask whether the Fed should have cut last week or whether it should cut aggressively at its next meeting in September. 

But this also doesn’t feel like a time to panic, and the big market moves on Friday may be more a signal about investor positioning than the health of the economy.    

For much of this year, investors have been sitting on big gains. After all, it was only two weeks ago that the S&P 500 was up nearly 20% on a year-to-date basis. 

Yes— a 20% gain in less than seven months— and it was a relatively smooth ride to get there. 

From the start of the year through the date of its all-time high on July 16, the S&P 500 had only seen one drawdown of any significance: a 5.5% pullback in April (which, ironically, was caused by fears that the Fed might hike rates because of accelerating inflation). 

Now we’re in the midst of another pullback—this one over 6%—as inflation worries turn into growth worries.

Could this become something bigger? Yeah, sure. But in the context of the market’s monster first half gains and a still-solid economy, it’s nothing to get worked up over.

Don’t let the panic on X fool you.