Wall Street plunged while bonds surged higher Friday after the government reported payrolls in August fell for the first time in four years rather than rising as had been expected. The Dow Jones industrial average fell nearly 250 points.
Investors were taken aback by the Labor Department’s report that payrolls dropped by 4,000 in August, the first decline since August 2003. Economists had forecast payrolls would increase by 110,000. However, the unemployment rate held steady at 4.6 percent as expected.
Wall Street had been awaiting the report all week as it sought to determine how well the economy was holding up under the weight of a faltering housing market, a rise in mortgage defaults and tightening availability of credit. While the report is backward looking, investors regard it as an important proxy of the economy’s overall health.
“This certainly cements the case for a Fed action at the next meeting. The debate has really become about whether it will be 25 or 50 basis points,” said Zach Pandl, economist at Lehman Brothers Holdings Inc., referring to whether the central bank would reduce rates by a quarter point or a half percentage point. He expects the Fed will reduce rates by 25 basis points to 5 percent when it meets Sept. 18.
According to preliminary calculations, the Dow fell 249.97, or 1.87 percent, to 13,113.38.
Broader stock indicators also skidded. The Standard & Poor’s 500 index fell 25.00, or 1.69 percent, to 1,453.55, and the Nasdaq composite index fell 48.62, or 1.86 percent, to 2,565.70.
The three major indexes, though still in positive territory for the year, all finished the week down more than 1 percent.
Bonds, meanwhile, soared following the jobs report as investors sought safety. The yield on the benchmark 10-year Treasury note, which moves inversely to its price, skidded to 4.37 percent from 4.51 percent late Thursday.
The dollar fell sharply following the report, as the likelihood of an interest rate cut appeared to increase. Dollar-based assets would earn less interest if the Fed were to cut rates. In addition, gold prices rose sharply because some investors would be expected to abandon a weakening dollar and move into gold if the central bank lowers rates.
“This is just the expected response,” said Pandl, referring to Wall Street’s reaction to the jobs report. “The markets are repricing for lower growth and expectations of Fed cuts.”
While the employment report clearly unnerved an already jittery Wall Street, some investors had been looking for a weak showing, arguing that a drop in employment could offer adequate reason for the Federal Reserve to lower short-term interest rates. But the employment report appeared to signal too much weakness even for those pulling for a rate cut. Making matters worse, the Labor Department revised the jobs figures for June and July, saying the economy added fewer jobs than had been reported.
The central bank has left its fed funds rate unchanged for more than a year as it has sought to hold down inflation. But recent upheavals in financial markets have stirred concerns of a slowing economy and led some investors to expect a rate cut.
Consumers who feel confident in their ability to continue to earn are likely to keep spending, investors reason, and consumer spending is responsible for about two-thirds of U.S. economic activity.
“It is a pretty solid data point that gives people real cause for concern,” said James Sonneborn, wealth manager at RegentAtlantic Capital LLC, noting that he generally tries to avoid placing too much emphasis on a single economic reading.
“It certainly gives the Fed cover to cut rates and the rationale,” he said, noting that the central bank has sounded fewer cautionary notes recently about inflation, always one of its chief concerns. Still, Sonneborn doesn’t expect the employment report will prompt the Fed to cut rates before its meeting on the 18th.
“They never want to show a panic. You might get a change in the commentary or the tone when the Fed president’s speak publicly. That might be their opportunity to verbally guide people toward what they’re thinking.”
Several regional Fed presidents are scheduled to speak next week.
Comments from one former Fed official — Alan Greenspan — perhaps added to Wall Street’s unease Friday. The Wall Street Journal reported the former Fed chairman on Thursday told a group of economists in Washington that the recent market turmoil is similar to that of 1987, when the Black Monday crash occurred, and of 1998, when the big hedge fund Long-Term Capital Management came close to collapsing. Greenspan’s comments come about a month ahead of the 20th anniversary of the stock market’s crash on Oct. 19, 1987.
The flurry of disappointing news came a day after stocks had posted sizable gains on the notion that mixed economic data revealed an economy that was holding up but not growing at such a pace to push inflation higher and rule out a rate cut. A variety of retailers posted stronger-than-expected sales for August, while a report on the nation’s service sector, where most Americans work, showed it expanded in August at the same rate as in July.
And on Wednesday, a series of anecdotal reports from the Fed’s regional banks found only limited instances in which the jitters in the financial markets in the past seven weeks — particularly in August — had dampened business activity outside the real estate sector.
Investors in oil appeared able to largely shake off concerns about the employment picture. Light, sweet crude rose 40 cents to $76.70 a barrel on the New York Mercantile Exchange.
Declining issues outnumbered advancers by more than 3 to 1 on the New York Stock Exchange, where volume came to 1.46 billion shares.
The Russell 2000 index of smaller companies fell 17.13, or 2.16 percent, to 775.79.
The U.S. jobs report prompted broader selling in markets overseas. Britain’s FTSE 100 closed down 1.93 percent, Germany’s DAX index fell 2.43 percent, and France’s CAC-40 fell 2.63 percent.
In Asia, Japan’s Nikkei stock average closed down 0.83 percent. Hong Kong’s Hang Seng Index fell 0.28 percent, while the often-volatile Shanghai Composite Index fell 2.16 percent.