Strategist: Selloff Reflects ‘Buy the Rumor, Sell the Fact’ Reaction to Fed Rate-Cut Signal
A spate of weaker-than-expected economic data contributed to Thursday’s selloff, pushing the Dow Jones Industrial Average toward its largest one-day drop since May.
Bad economic news translating into bad news for stocks seems logical but contrasts sharply with the pattern seen during much of the 2024 rally, where disappointing economic data often buoyed stocks by bolstering the case for Federal Reserve rate cuts.
So, what’s changed? Despite a generally robust labor market, emerging cracks are evident. Several consumer-focused companies report that lower-income consumers are under increasing stress.
After the Fed’s policy meeting on Wednesday, Chair Jerome Powell hinted that a rate cut might happen in September if economic data aligns. However, some analysts believe the Fed has delayed easing for too long.
Neil Dutta, head of economics at Renaissance Macro Research, noted, “The Fed’s inaction, combined with today’s rising jobless claims, low unit labor costs, and a slowdown in global manufacturing, points to a scenario where bad economic news impacts markets negatively.”
Thursday’s economic data was indeed bleak. First-time jobless claims reached a nearly year-long high, likely affected by seasonal auto-plant closures. The Dow stock selloff intensified following the Institute for Supply Management’s July manufacturing index report, which fell for the fourth consecutive month to 46.8% from June’s 48.5%, indicating a contracting manufacturing sector.
Ian Lyngen, rates strategist at BMO Capital Markets, observed, “Bad news is bad again. Jobless claims rose, ISM underperformed, unit labor costs lagged, and stocks sold off. The macro narrative is shifting, and the data hasn’t yet hit a deeply concerning inflection point.”
Treasury yields fell in response, with the 10-year note dropping below 4% for the first time since February. Yields move inversely to price.
The Dow ended the day with a loss of around 495 points, or 1.2%, after plunging as much as 744 points. Cyclical stocks initially led the decline, followed by tech stocks. The tech-heavy Nasdaq Composite slumped 2.3%, the S&P 500 fell 1.4%, and the small-cap Russell 2000 dropped 2.3%.
Not everyone sees this as a growth scare. Kent Engelke, chief economic strategist at Capitol Securities Management, noted that the market’s turn lower appeared to be a “buy on the rumor, sell on the fact” response to Powell’s hint at a future rate cut.
Additionally, tech stocks remain highly priced, and disappointing results from companies like Amazon and Apple could lead to further declines.
