U.S. stocks plunged Wednesday, as weak economic data rattled investors. After gyrating throughout the day, the S&P 500® Index closed down 1.79%, while the Dow Jones Industrial Average—at one point down more than 500 points—closed down 1.86%. Both indexes have lost roughly 3% over the past two days. Here’s what investors should know.
What’s driving stock markets lower?
The decline began Tuesday, after the Institute for Supply Management (ISM)’s monthly survey showed manufacturing activity shrank to its lowest level since June 2009. Then on Wednesday, a weak ADP private-sector hiring report and soft third-quarter automaker sales added to investor jitters. Also, the Conference Board’s measure of CEO confidence in the economy fell in the third quarter to its lowest reading since 2009.
Investors have been watching for any signs that manufacturing weakness is starting to spill over into services or consumer-based areas of the economy. S&P 500 companies will begin reporting third-quarter earnings soon, and the outlook already is grim: the analyst consensus is for a year-over-year decline.¹ We expect markets to be highly focused on any comments company managers make about the impact of trade uncertainty and tariffs.
Hopes for a comprehensive trade deal with China remain dim. Meanwhile, the World Trade Organization on Wednesday authorized the U.S. to impose $7.5 billion in tariffs on the European Union over a long-running dispute over European subsidies for European airplane maker Airbus. The EU has a similar claim against Boeing, and has also readied retaliatory tariffs.
Does the weak economic data mean a recession is coming?
It’s too soon to tell. Although recession talk has grown louder, particularly after the three-month/10-year Treasury yield curve inverted in March (the two-year/10-year yield curve inverted in August), predicting a recession is a complicated task, with a lot of moving parts. Although yield curve inversion (that is, when short-term rates become higher than long-term rates) historically has been a reliable recession indicator, it’s not foolproof—at times the yield curve has inverted but a recession hasn’t followed. Even when it does, the time lag between an inversion and a recession can vary widely.
Does this mean the Federal Reserve will cut rates again?
We think it’s likely the Federal Reserve will likely cut short-term rates at an upcoming meeting, either in October or December. And aside from anything the Fed might do, a decline in manufacturing activity could lead to even slower global growth, resulting in greater demand for U.S. Treasury securities as investors seek out high-quality safe-haven investments. That would keep bond yields low (remember that as bond prices rise, yields fall).
However, lower interest rates are not a panacea. Lower rates alone may not be enough to offset the negative impact of a prolonged trade dispute or slower global growth.
What’s next?
Attention will now turn to economic reports due later this week, primarily ISM non-manufacturing (that is, services) data on Thursday and the September U.S. employment report on Friday. Both will be used to gauge whether manufacturing weakness is spreading to the services/consumer segments of the U.S. economy.
What should investors do now?
Market drops are an unavoidable feature of investing. What matters is how you respond—or, more to the point, don’t respond. Sometimes the best action to take is no action at all. If you’ve built a portfolio that matches your time horizon and risk tolerance when markets are calm, then a surge in turbulence may not feel so rough to you.
However, if you’re looking for something specific to do now, check out some steps that every investor should consider. Or watch Charles Schwab, Chairman of the Board and Founder of Charles Schwab & Co., discuss his approach to market volatility.
What if you’re near retirement, or have a short investing horizon? Here are some things to consider if you don’t have much time to recover from market volatility.
¹Based on I/B/E/S data from Refinitiv.
Important Disclosures
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market or economic conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
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Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.
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