Stocks Sell Off On Weak Jobs Data… And The Chip Rout’s Impact On The Market Description 8/2/24

0:01Live from the Nasdaq MarketSite in the heart of New York City's Times Square, this is Fast Money. Here's what's on tap tonight. A major market sell-off. Stocks limp into the weekend as the Dow falls over 600 points and rates tumble. The 10-year falling to 3.8 percent. Will this Friday fade continue into next week? We'll debate that. Plus, a free fall at Intel shares crater, down 26 percent today as the chipmaker cuts its workforce, halts its dividend, and gives the street a grim forecast for the months ahead. Just how did Intel go from chip pioneer to industry afterthought? We'll go inside the numbers.

0:34And later, an epic week for the volatility index, a bruising day after earnings for Amazon, and a surprising number of bright spots on an otherwise awful day for your money. I'm Melissa Lee coming to you live from Studio B at the NASDAQ. On the desk tonight, Karen Feinerman, Bono & Eisen, Carter Wirth, and Mike Coe. And we start off with, of course, the market sell-off on Wall Street today. Markets closing off their worst levels of the session, but the NASDAQ still sinking nearly 2.5%. It is now down more than 10 % from the all-time high hit just three weeks ago. The S &P down nearly 2 percent, while the Dow shed 611 points, its biggest point drop since February 2023.

1:09The small cap Russell 2000 index leading the losses down more than 3.5 percent. It has now nearly erased all its gains since the great rotation started last month. The consumer discretionary sector, the biggest laggard today, with Amazon leading those losses after it gave weak guidance for the current quarter. Financials and energy stocks also falling. And take a look at the move in rates. The 10-year yield sinking to its lowest level of the year. It is down almost 100 basis points from its recent highs. The latest moves come after a disappointing jobs report. Payrolls in July grew by just 114 ,000, well below expectations.

1:45And the unemployment rate hit its highest level in nearly three years. That might have really changed the calculus for the Fed. Markets now pricing in a more than 70 percent chance of a 50 basis point cut at the September meeting compared to a 22 percent chance yesterday. So with the central bank now potentially worried about both sides of its dual mandate equation, where do we go from here? Let's bring in Steve Leisman for some answers. Steve, was it really that bad? Well, certainly the market took it this way. And what happened, as you just described, Melissa, the jobs report dramatically changing the outlook for Fed rate cuts, raising the question as to whether the market may be, you know, maybe moving a little faster than policymakers are likely to alter their own views on the economy and how much monetary policy medicine might be required here.

2:34As Melissa just said, I have a slightly different look on it. Same idea, though. Before the jobs report, we were at 31 percent probability of a 50 base point cut. Now it's 73 percent. Joe Livornia, chief economist at SMB NICO Securities, writes, Given the fact that the Fed was super dovish before the extremely disappointing July employment results, monetary policymakers are likely to err on the side of doing more, not less. The market now priced for a Fed that cuts rates seriously and sequentially as if a recession were imminent and confirmed. 126 basis points of cuts now through the end of the year.

3:05That's 525 BIP cuts and 200 for over a course of a little less than a year for eight cuts in total. Remember, we've been here before. That would bring the funds rate down to 330 or so by June or just a bit above the neutral rate. As of Wednesday, Fed Chair Powell and the Fed Committee saw continued strength in the economy. They're going to be, I think, a little more reluctant to change that view on a single jobs report, which is to say the market looks somewhat aggressively priced here longer term based on the data we have now. But of course, Melissa, there's a lot of data between now and that September meeting.

3:39There are. And I keep going back to that statement that Fed Powell made, which is data dependent, not data point dependent. And this is data point dependent. And that's what Wall Street has been doing. Michael Faroli over at J.P. Morgan saying that there may be a strong case to act even before the September meeting. What happens before the September meeting, of course, is Jackson Hole. Do you think the Fed could open the door to a bigger rate cut potential in September? Well, I mean, here's the thing. I had not seen that comment by Mike Faroli, whose analysis I follow carefully and whose opinion I take seriously.

4:12But I really do think you would have to have a serious deterioration in the data. I don't think it's there. I mean, if we hover at this 250 on jobless claims, I think the Fed would be very reluctant to cut earlier than the September meeting. And I think that you want to watch the jobless claims. Watch the consumer numbers. I think that's a place where the Fed, if they do tank and tank seriously, that's going to alter the GDP outlook, suggest either a stalling or a contraction in the economy. That would move the Fed. But your point is really important, Melissa. You talked about this idea that the Fed's going to have tolerance on either side of the mandate.

4:49A little bit more inflation is not going to stop it from cutting and a little bit more weakness is not going to keep it is not going to make it all that concerned about there being an imminent recession. Steve, it's Karen. Thanks for being on. So in those most aggressive cuts that are getting priced in, what do you think they assume for both inflation and employment? Well, there would be no inflation in that context. And I think I really think, as I said, Karen, that the market is pricing in an imminent recession and a pretty pronounced one. It looks to me like those are the kinds of moves, if you put that chart back up, that shows how much is expected over the next four months and over the next year.

5:32Those are the kind of numbers that the Fed would or the kind of cuts the Fed would make if it feared a recession. It would get back down to neutral very quickly. And heck, why not even go further? Why not go below neutral to try to stimulate the economy. And I just don't know that the data supports that kind of imminent, ready to make a call for recession. I will point out, though, on the other side, Citi just putting out a report suggesting that a recession may already have begun. Again, I have not seen that in the data yet. It does go back to the notion of the long and variable lags, which Chair Powell had said he believes you're already seeing in the economy and whether or not, you know, what we're seeing and what we will continue to see are those long and variable lags, and that will actually impact the jobs market even more harshly than we are seeing it in this most recent jobs report.

6:24Are you surprised that Wall Street, you know, on one report was so willing to change its forecast almost completely in terms of cuts? Well, I'll let the smarter people than I am about the stock market talk about this. But I think, Melissa, this is leg three of a series of things. The first thing was we started to question the valuations of some of those high-flying AI stocks out there. Where's the profits? Where's the beef on that? Two is I don't think that the revenue and the earnings numbers came in commensurate with the overall valuations of the stock market. And now this ends up being the third leg of that.

7:02So I don't think it's fair to say it's just one jobs report. I think it's all a question of valuation on the equity side, on the fixed Yes, I agree with you. I think it's a long way to go on a single jobs report. All right. Steve, great to see you. Thank you. My pleasure. Steve Leisman. So, Micah, what's your take here on what happened today? Well, I think basically the employment data that we're seeing kind of confirmed, it's kind of like a confirmation of some of the worst fears that I think some people may have had. I mean, we've had a lot of data that's come out that isn't necessarily all that positive.

7:38But employment data was basically, you know, it wasn't really sending any alarm bells. But when we look at consumer data, we do see some. And when we see business sentiment, we do see some. And, of course, we've had other leading economic indicators that have tipped in the favor of indicating that we might be getting a recession. So when you start to see this, I think we talked about this before, that, you know, employment is going to be a lagging number. So I think this is sort of that confirmation. We're getting numbers that are worse than the survey. We have obviously seen some big increases in auto delinquencies.

8:09We've seen that credit balances are up, savings are down. We see business surveys that are indicating that there's not a lot of confidence. And this is just one more thing. And we never really know what the tipping point is going to be. But this clearly indicated that it was one of those. VIX is proving that, too. For an economist kind of guy, Steve, I think, had it really spot on in terms of, you know, this is the culmination of a number of things that we saw in the stock market. And this just underscores that notion that perhaps things are much weaker than we think. We've seen, you know, as Mike has said, delinquencies rise.

8:41We've seen income levels, all cohorts of income, express difficulty in terms of buying and weathering price increases. We've seen the earnings come in light. We've seen the questions around the AI spend. No more blank checks for these companies, Bono. And then we get the jobs report. And it's like, bam, you know what? There it is. Proof that things are slowing. Listen, I tend to agree in large part with that narrative. I think, however, some of the price action pushes back against that. We saw this, whatever you want to call it, rotation, for lack of a better word, into small cats. But that flies into the face of much of what you just said and what I'm agreeing with and what I also think Mike Coe just mentioned.

9:17In terms of the move since the beginning of July. Which is in terms of this being a confluence of data that's starting to confirm perhaps worst case scenarios. Listen, I do think a lot of the data, first of all, I think there's been a dichotomy between the first and second quarter. Sorry, the first and second half of the year. You've seen a lot of contradictory data there. What I'm saying is that the unemployment, sorry, the employment number today, I think, really pushed people over the edge. Because just prior to that, you were seeing a massive rotation. I'm with you in terms of the AI spin, CapEx spin and concerns about that.

9:53But you're seeing a massive rotation into more speculative in terms from a credit quality standpoint in the market. And perhaps you could argue that that was a trade down. But you had to think that the economy was still chugging along at a decent clip if you were willing to take the inherent risk that comes with investing in those type of companies. The reversal today seems to me to suggest that that narrative is now being called into question. Well, it's sort of, you know, we always hear don't fight the Fed. So we got since Wednesday, I guess it's only 48 hours ago, don't fight the Fed. And boy, they're really fighting the Fed.

10:29I would think that I think Monday we probably sell off again. And then I would look to be buying things on Tuesday. I think that I understand the AI story. And is that overhyped? OK, I get that. But then you have a lot of other companies that the valuations have come in a lot. They're in they have great balance sheets. And so to me, I think the backdrop of Fed cutting is not bad. Right. Could things go down more? Yes, of course. But I also think that this the magnitude of this swing. Right. What would it take? Probably not a lot. One data point of better employment. Right. And then everyone just calm down a little bit.

11:10Then do these economists reverse their calls for 50 basis points? I mean, there are a number that went up a lot in terms of the number of cuts for the rest of the year. I mean, a couple of them did two 50 basis point cuts between now and the end of the year. I think we're based on one data point. On one data point. So would it be shocking to see that data point come in a little bit different? No. No, really not. So, you know, things seem to get, I don't know, don't panic. I feel like it's really the message. Carter, should we panic based on the charts? I mean, for the week, it's really not been too terrible.

11:44S &P is down only 2%. It's felt awful, though. That's right. It hasn't been that bad. I mean, to think that the market itself is what from its peak down 6.4%, but it's much worse at other aggregations, right? The SOX is down 23 from its peak. The Q's down 12. The tech sector down 15. But the S &P down 6.5 is not that much. The irony, of course, of this is that the surge since April, right, the period where the S &P was trading below 5 ,000, hit almost 5 ,700. We're up 15 percent. Why? Because rates went from 4.75 to 4.142. But now, if we should continue that premise, now that we're 3.8, we should rip this market.

12:28Because people know it's not that lower yields equal higher prices like some sort of sacrosanct perfect formula. But what we're looking at is the collapse in industrial commodities, copper, zinc, aluminum, and rates plunging. The soft landing narrative is almost preposterous. What do you see for rates? Because I saw even three, you know, we dipped below 3.8. We were in the 3.7s for some time. So where do we go, Carter? Where's the support? There really isn't. But I guess the question is the implications of all of this and how ultimately maybe this is worth spending two seconds on. Let's talk about the sell-off.

13:12And you started with this. It's not that bad so far, right? 6.5 percent. So consider this. All instances where the S &P 500 has dropped more than 5 percent since 1929, since its inception going back. And there's a lot of good data around that. And the reason we use 5 percent, you go up 2 percent or down 4, down 3 or down 1. That's noise in the stock currency, commodity index. But once you go down to five, whether it's because stop losses are triggered or people's comfort level, typically you'll go down more. So here are the actual numbers. There have been 239 instances going back to the inception of the S &P where it's dropped 5 % plus.

13:47Now, of those, the average decline is 11.8 % and the median is 8.25%. So this one is 6.5%. it's nowhere near the median or average decline of somewhere between 8 and 11. And interestingly, it's identical to the one we saw in April. We know that on April 1st, three weeks later, we were down 5.9 percent. Just happened. And that was a shallow one, but it was the 5 percent plus. This one's 6.5. That was 5.9. This is identical in terms of the April sell-off. That was 14 sessions. This is 13 sessions. But the shallow ones are not as likely. Usually you go down more somewhere between 8 and 12. I would have that in my mind as I approach the market on Monday.

14:30All right. For more on the markets and the bond markets, let's bring in Andy Constant, CEO and Chief Investment Officer at Dam Spring Advisors. Andy, great to have you with us. Why do you think the equity markets are all of a sudden more worried about the jobs picture than the Fed seemed to be earlier this week? Yeah, I'm not sure the equity market is that worried. As Carter mentioned, we're down 6 % from the all-time highs. And earnings expectations are still for 11 % growth. And the P.E. multiple is just shy of 21. Equities seem to be fairly blasé about what's happening in the bond market. What's happening in the bond market, Steve said a lot about it.

15:14We went from a June sort of SEP where we started pricing in normalization cuts to the last week when the two -year note and short-term interest rate markets priced in significant accommodation cuts that look like, well, that are the sort of cuts one would expect if an imminent slowdown was going to occur. And so my question that I'm thinking about is the Fed hasn't done anything, right? They haven't cut at all. The market has done the cutting. It's already at these extremely low yields relative to the conditions. The question I have is why. And I look to the last month as a major deleveraging.

16:05You saw the rotation, which was a deleveraging of positions of short Russell maybe and long mag seven. And then you also saw we've now seen a 15 handle move in the Japanese yen, which is a financing currency that has caused margin calls on the carry trade. And so I think assets are selling off globally. Risky assets are selling off. And when that deleveraging happens, money is paid back to people or people go to cash. And now they have to put their cash somewhere. And paying up a dime or even a quarter of a point for a two-year note seems like nothing, even though it's 50 or 100 basis points of yield change.

17:02So I'm cautious about the two-year change in yield being a forecast for the Fed's activities. So in other words, you're doubtful that it actually reflects what the Fed is going to do. So therefore, you are short two years? Yes. Today, I went short something that looks like a two-year note. And I saw the market participants, all the ones you mentioned, now following the pricing and changing their estimates to cuts of 50 basis points in September, 125 basis points, etc. And that's people following the market price, which may not actually have a lot to do with market expectations of the Fed's actions and may have a fair amount to do with a rush to a safe asset in a deleveraging.

17:58So, Andy, it's Karen. Thanks for being on. I know you are read the damp spring report, which is excellent, by the way. You have talked about being short twos and spooes. So I get what you're saying on the twos part that a lot of the cutting is already priced in. On the spooes part, where would you look to unwind that trade relative to each other? I'm glad knowing you for as long as I have. I'm glad you know what spooes are for the viewer. They are the S &P futures contract. It's what us old. Well, at least one old person calls the S &P contract. We're the same age, Andy. Yeah, that's true, Karen.

18:36And so what I'm saying on that is for the two-year note to appreciate, we have to have an even more deeper and severe recession than is currently priced. So those aren't going to go anywhere. Those aren't going to go up unless we have that severe recession. But in a severe recession, we have 11 % earnings growth in earnings estimates. and a 21 multiple, even if you assume that the multiple gets cut by 5 % and the earnings expectations fall 5 % in terms of in absolute sense, you could see easily for just a garden variety, meaning what's priced in the two-year already, 10 % sell-off in equities.

19:24Now, that may not happen because the two-year may be the part that's rich, but they both can't be where they are. So I'm short on both. All right, Andy, we've got to leave it there. It's always great to get your take on things. Andy Conson of Damped Spring. Mike Coe, what do you think of Andy's trade? How are you feeling about a further decline on Monday? So I think it's possible for multiple things to be true. I think that Karen's sentiment that some things are starting to get cheap might be prompted by the fact that whenever you get sort of an accelerated sell-off, when you start seeing the VIX, for example, get above 20, that oftentimes you start to see short term returns.

20:03So what's the S &P going to do over the next 30 calendar days? Is it going to be higher or lower? And if so, by how much? It is true that when you start seeing things like implied volatility at higher levels, that 30 day returns for the S &P can be higher. But the thing is, it matters from whence you came. And this is where Carter can also be right, which is, and Andy too, I have to say, which is that if we're going to expect some kind of a correction, you know, 10, 12 percent would be a reasonable number to target. And when the VIX goes from where it was, a relatively complacent place, and then shoots higher, we're in a 1 percent area for what the VIX did today and over the last couple of days.

20:40It's up over 50 percent from its 30-day moving average prior to that. That's about a 1 percent event over the course of the VIX history, which goes back to the earliest days of 1990. And the S &P returns over the next 30 days are typically not that good when that happens. You know, we're looking at 80 basis points over 30 days on average long term and since 1990. But when you get to the kind of price action that we've had in the VIX over this week, it's actually negative. And that's pretty rare. Mike, it's Karen. I don't know. You're not a guest, really. We're panelists together. But anyway, I've seen this Friday summer sell off and then a Monday sell off and a Tuesday morning down.

21:18And that big sort of whoosh down is often the short-term bottom. Do you see that happening here? Yeah. I mean, look, I think that if you get three really negative days, oftentimes you can catch, and look, you can get a bear market rally. So I'm not saying that this is a bear market. It's not even a correction, not formally, even not a correction yet. And if you get a lot of pressure, if we get one and a half down, two down, like we got two plus today, and a couple more days like that, yeah, typically you would expect to get some kind of a bounce. Things don't go straight down. Typically, we all know that we've been at this long enough.

21:52But, you know, I think it's important to understand where we're coming from. We're coming from a pretty complacent market and we're coming from a very complacent narrative, this no landing narrative. And I think there's some evidence that's not true. All right. Do not miss a CNBC special on today's market sell off. Kelly Evans will host that right after Fast Money, 6 p.m. Eastern time. Coming up, much more in today's week, just including the drop in Amazon, how Apple bucked the trend. The details on the names next. And it wasn't just Apple. Some staple stocks, a bright spot in today's sea of red.

22:22Should you ride out the storm in this group, don't go anywhere. More Fast Money in two.

22:38Welcome back to Fast Money. Apple and Amazon heading in different directions after yesterday's reports the iPhone maker managing to pull off a gain today, though it had been up more than 3.3 % at its highs. Amazon, meantime, sank nearly 9%. It lost nearly$170 billion in market cap just today, its second biggest one-day loss since going public. The e-commerce giant giving weak revenue guidance for the current quarter, saying consumers were distracted by world events. What do you make of this huge decline for Amazon and the fact that Apple was able to hold Bono in? I think it's, on Apple's side, I think it's a perception of safety.

23:10They have not had the AI spin, the CapEx type of load that we've seen from a lot of the other hyperscalers and large Mag7. And I think that's being called into question now. And they're kind of executing on what's perceived to be the right side of the fence in terms of that. On the Amazon side, I feel like the AWS numbers were just completely ignored. They were completely pushed to the side. And to an extent, you start to see it in the price action. You know, this morning, it was down double digits. And then by the end of the day, I mean, I miss some trying to kind of scoop the low there for short term trade.

23:40I think people kind of start to wrap their mind around. Well, listen, what's going to be the real long term engine of growth? We we know that the consumer is under pressure. That's not new news. And so being that we tend to think that markets are efficient and are going to be able to get to equilibrium immediately after having a release. I was a bit surprised just to see how far Amazon had fallen and less surprised to see that it seemed to be that investors had kind of come to their senses around the AWS numbers and looked for an opportunity to buy that stock lower. Carter, what did you make of that Amazon drop?

24:12Yeah, so it has two. Well, the drop is bad. Let's start with that. It's a heavy volume drop and gap news related. The curious thing is that it closed almost at the high of the session. So to some extent, versus the Qs, versus the IWM, versus the SPY and so many others, it shook off intraday the preponderance of the weakness and almost, while still having dropped in gap, closed at the high. It felt like that low will hold versus other lows which won't. So I look at, you know, Walmart. Walmart was down 2 percent. So if we use that as a proxy for the rest of Amazon's business, right, and try to interpolate a multiple, I totally agree to your point of AWS was just kind of ignored, which was a really good number.

24:59Within, though, this cloud of how does one monetize AI? Well, one monetized selling compute power on the cloud. That's one way. But I understand that. I don't know. I just think that this was kind of an overreaction as well. So could it go down more? Of course. But I think that it just sort of got caught up in the tide. Coming up, a few names weathering today's big sell-off. The staple stocks that could be a safe haven for your money. That's next. And a massive drop in Intel. It's worst day in nearly half a century. And the entire chip space is feeling the blow. What it means for the broader tech sector ahead.