Weak jobs report sends stocks plummeting on recession fears. Adam Turnquist, chief technology strategist at LPL Financial, explains more.
Wall Street’s fear index surged to its highest level in more than four years early Monday amid a global market sell-off.
The Cboe Volatility Index, or VIX, a gauge of investor fear, surged 172% to 62.27 before the open on Monday, the highest since the start of the coronavirus pandemic in March 2020, when the index rose to 85.47.
The VIX index is based on stock option prices on the S&P 500 and is used to measure expected volatility.
The VIX has remained relatively stable since the pandemic began, never closing above 40, but began to spike last week after a weaker-than-expected July jobs report rekindled fears of a recession.
July jobs report sparks reliable recession indicator
Traders work on the floor of the New York Stock Exchange during afternoon trading on August 2, 2024 in New York City. (Photo by Michael M. Santiago/Getty Images/Getty Images)
The Labor Department reported that payrolls rose by just 114,000 last month, while the unemployment rate jumped to 4.3%, the highest level since October 2021. The report added to evidence that the economy is weakening on the back of high interest rates.
That’s because the rise in unemployment triggered the so-called thumb rule, a gauge used to signal early signs of economic downturns. The rule states that a recession is likely when the three-month moving average of the unemployment rate is at least 0.5 percentage points higher than its lowest point over the past 12 months.
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The unemployment rate over the past three months has averaged 4.13%, 0.63 percentage points higher than the 3.5% forecast for July 2023. The Sarm Rule has accurately predicted every recession since the 1970s.
Stocks tumbled on Friday following the report, with the S&P 500 posting its worst day since October 2022.The indexes resumed their downward trend in early trading Monday amid growing selling pressure. The Dow Jones Industrial Average fell more than 1,000 points and the tech-heavy Nasdaq Composite Index fell 3.9%. The S&P 500 slid a further 3%.
The Marriner S. Eccles Federal Reserve Bank Building in Washington, DC, June 25, 2024. (Photographer: Ting Sheng/Bloomberg via Getty Images/Getty Images)
“The United States is the locomotive of the global economy, and growing concerns about a slowdown or even a possible recession are roiling markets around the world,” said Greg McBride, chief financial analyst at Bankrate.
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The slowing job growth is also raising questions about whether the Federal Reserve was too slow in cutting interest rates, which are currently at their highest level in 23 years.
Policy makers decided to keep interest rates on hold at their meeting last week but left open the possibility of a cut in September, with more investors pricing in the possibility of a bigger cut of as much as 50 basis points as job growth slows sharply and worries about a recession grow.
