Introduction
On Friday, the stock market saw a sharp sell-off, with the S&P 500 capping its worst week since March 2023. Investors reacted negatively to a disappointing August jobs report and a broader sell-off in top-performing technology stocks. The S&P 500 dropped by 1.73%, closing at 5,408.42, while the Nasdaq Composite plummeted by 2.55%, ending the week at 16,690.83, marking a 10% drop from its all-time high. The Dow Jones Industrial Average also lost 410.34 points, or 1.01%, closing at 40,345.41.
Emily Roland, co-chief investment strategist at John Hancock Investment Management, highlighted that this is a sentiment-driven decline, fueled by concerns over economic growth and the possibility of the Federal Reserve tightening monetary policy. "The market continues to waver between interpreting bad news as either a catalyst for further trouble or as a signal for a more aggressive response from the Federal Reserve," she noted.
Weekly Market Overview
This past week was turbulent for the stock market, with concerns over economic data and the Federal Reserve's next move driving significant declines. The S&P 500 posted a 4.3% weekly drop, marking its worst performance since March 2023. The tech-heavy Nasdaq, which has been leading market gains throughout much of the year, suffered a 5.8% weekly loss, its steepest since 2022. Meanwhile, the Dow Jones fell 2.9%, driven by weakness in large-cap stocks across multiple sectors.
A major factor contributing to the sell-off was the release of weaker-than-expected August labor market data. Nonfarm payrolls increased by 142,000, falling short of the 161,000 gain projected by economists. Despite the disappointing jobs data, the unemployment rate fell slightly to 4.2%, which matched expectations. Investors remain focused on whether the Federal Reserve will cut interest rates at its next policy meeting, with the market broadly expecting a quarter-percentage-point reduction. However, some are predicting the Fed may take more aggressive action given the signs of a softening labor market.
Charles Ashley, portfolio manager at Catalyst Capital Advisors, noted that “the market is searching for direction, and much of that will come from the Federal Reserve.” According to the CME Group's FedWatch Tool, traders are now split between whether the Fed will opt for a quarter-percentage-point or half-percentage-point rate cut. This uncertainty has been a major driver of volatility across all asset classes.
Tech Sector Struggles Amid Broader Market Decline
The technology sector bore the brunt of Friday's sell-off, as investors distanced themselves from riskier, high-growth stocks. Amazon tumbled 3.7%, Alphabet fell 4%, and Meta Platforms dropped by over 3%, reflecting growing concerns about the sector’s exposure to weakening consumer demand and economic uncertainty. Semiconductor stocks also faced heavy losses, with Broadcom leading the decline, falling 10% after issuing underwhelming guidance for the upcoming quarter. Nvidia and Advanced Micro Devices each saw declines of around 4%, pulling down the VanEck Semiconductor ETF by 4%, marking its worst week since March 2020.
This tech sector downturn capped a rough week for the broader market, with investors reassessing valuations and moving away from growth-heavy portfolios. Despite strong earnings earlier in the year, tech companies are facing renewed pressure from macroeconomic factors, including rising interest rates and weakening consumer demand.
Oil Price Decline and Impact on Energy Sector
Oil prices took a significant hit this past week, with U.S. crude oil dropping by 8% and Brent crude losing 9.8%, marking the worst week for crude since June 2023. This sharp decline in oil prices comes amid growing concerns about global demand, especially as China continues its aggressive shift toward electric vehicles, which has reduced the demand for gasoline and other fossil fuels. Additionally, OPEC+ delayed plans to increase oil production until December, causing further uncertainty in the global supply-demand balance.
The energy sector, which had previously been a market leader, also saw major declines. Notable losers included APA Corporation, Valero Energy, and Occidental Petroleum, all of which posted significant losses for the week. The sector’s underperformance reflects broader concerns about energy demand amidst ongoing global transitions to cleaner energy sources and economic uncertainty.
International Markets and Investment Opportunities
While U.S. markets faced significant turbulence this past week, international equities, particularly those in Europe, Canada, and the U.K., have become increasingly attractive to investors. Investment strategist Jeffrey Kleintop from Charles Schwab advised that international markets have been less exposed to the AI-driven rally that dominated the first half of the year, making them a safer bet amidst the current market rotation. European equities, in particular, are seeing strong performance, driven by resilient consumer demand and less exposure to tech sector volatility.
International markets may offer better diversification and less risk for investors looking to hedge against U.S. market volatility. Canada’s energy sector has shown strength, benefiting from global energy demand shifts, while U.K. equities have outperformed U.S. counterparts in recent weeks.
Goldman Sachs' Rate Cut Predictions and Broader Economic Outlook
Jan Hatzius, chief economist at Goldman Sachs, offered his outlook on Federal Reserve policy, predicting three consecutive interest rate cuts of 25 basis points each by the end of 2024. While there is potential for a larger 50-basis-point cut, Hatzius expects the Fed to opt for more modest reductions, especially given the recent weakness in the labor market. The potential for rate cuts has bolstered some optimism among investors, particularly in the financial and real estate sectors, which stand to benefit from lower borrowing costs.
However, concerns about a potential economic slowdown continue to weigh on investor sentiment. Weak labor market data and persistent inflationary pressures could complicate the Fed's efforts to balance growth and inflation, with some analysts warning that a recession could still be on the horizon.
Sector Performance and Broadcom's Outlook
Information technology led the week’s losses, dropping more than 7%. Major companies like Broadcom, Intel, KLA Corporation, and Nvidia were among the biggest decliners, each experiencing double-digit percentage losses. Despite this, some analysts remain optimistic about the long-term outlook for tech, particularly in areas like artificial intelligence (AI) and cloud computing.
Toshiya Hari, a Goldman Sachs analyst, maintained a buy rating for Broadcom, arguing that the recent sell-off is more of a short-term “hiccup” rather than a fundamental shift in the company’s outlook. Hari noted that Broadcom’s exposure to the AI semiconductor business, along with other growth areas, should support a recovery in the near future.
Play of the Week: $LULU (Lululemon)
Consolidation and Gap Fill Play:
Lululemon ($LULU) has been consolidating following its recent earnings release, and analysts are watching for a potential move to fill the gap at $244.50. This could serve as a key support level for a bounce, presenting an attractive buying opportunity.
Primary Entry:
Look for a pullback to the $244.50 gap area and monitor for a bullish bounce as a signal to enter long positions. Confirmation from price action will be crucial in determining whether this level holds as support.
Upside Targets:
- First Target: $250
- Second Target: $260
- Third Target: $275
Exit Strategy:
Consider taking profits around the $250 level, with additional exit points at $260 and $275 if momentum continues. Be sure to monitor broader market conditions, particularly in the retail and apparel sectors, as they could influence $LULU’s performance.
Stop-Loss:
Set a stop-loss just below $244.50 to manage downside risk. Reassess the position if $LULU breaks below this support level, as it may indicate further weakness in the stock.
Additional Considerations:
Keep an eye on the broader market and retail sector trends, as these factors could impact Lululemon’s price action. If the stock gains momentum before the gap fill, watch for potential rejection near the $275 resistance level. Before making any investment decisions, conduct thorough research and consider consulting with a financial advisor.
Conclusion
The stock market experienced significant volatility this week, driven by disappointing labor market data and rising concerns about economic growth. Tech stocks, which had been leading the market earlier this year, saw sharp declines, while sectors like energy and international equities offered some diversification opportunities. Investors remain focused on the Federal Reserve's next move, with rate cuts expected to play a critical role in shaping the market's direction in the coming months. Keep an eye on market shifts and stay updated with our free newsletter. Join our Discord server for real-time alerts and analysis.