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Risk-off sentiment dominated the markets on Friday, leading to significant losses in equities while bonds and gold surged. as investors sought refuge in safe-haven assets amid escalating economic risks.
The CBOE Volatility Index (VIX), also known as the market fear index, skyrocketed over 50% to reach a level of 28 by 11 a.m. in New York, marking its highest point since the fallout of Silicon Valley Bank and Signature Bank in March 2023.
The warning signs were evident earlier in the week due to disappointing economic data, particularly the ADP private employment numbers and the July ISM manufacturing activity survey, with the latter revealing a marked contraction.
The official July jobs report released Friday further confirmed fears, indicating emerging cracks in the U.S. economy, which no longer seems recession-proof as it had been until now.
Nonfarm payrolls slowed from a downwardly revised 179,000 in June to 114,000 in July, and the unemployment rate unexpectedly rose from 4.1% to 4.3%.
“People underestimate how much lower rates may need to go to stimulate a weak economy no longer juiced by government spending,” wrote Bank of America chief investment strategist Michael Hartnett in his latest “The Flow Show” report.
According to Hartnett, a reversal of the “anything-but-bonds” trade that has dominated markets over the last three years is driving an “old school summer risk-off.”
“I am stunned by how quickly the market narrative has changed about what the Federal Reserve should do. The widespread comfort of just a few days ago about the Fed having time to wait until September to cut rates by 25 basis points is being replaced by more analysts and economists calling for a 50 basis point cut. I’ve even heard someone mention a cut between meetings!” wrote renowned economist Mohamed El-Erian on social media platform X.
El-Erian highlighted that a 25 basis point cut is more likely, despite his consistent argument that the Fed should have cut rates last Wednesday.
The tech-heavy Nasdaq 100 index, as tracked by the Invesco QQQ Trust (NASDAQ:QQQ), fell 3% on Friday following a 2.4% drop on Thursday, marking its worst two-day decline since November 2022.
The drawdown from the July 10 peak has now exceeded 11%, triggering a correction phase for the index.
Image: Benzinga Pro
Within the tech sector, the semiconductor industry was the hardest hit. Semiconductors, as tracked by the iShares Semiconductor ETF (NYSE:SOXX), have experienced a double-digit drop in the last two sessions, marking the worst performance since March 2020.
Notably, the industry gauge has entered a bear market after declining more than 20% from its all-time highs reached in July. Moreover, the SOXX ETF has fallen below the support of the 200-day moving average for the first time since November 2023.
Image: Benzinga Pro
The economically sensitive Russell 2000 index of small caps, represented by the iShares Russell 2000 ETF (NYSE:IWM), is on track to post a cumulative drop of 7% in the last two sessions, the worst selloff in over two years.
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