Stock Market Volatility: Economic Data and AI Trading Spark Concerns

Article Summary:

• Growing concerns about the impact of AI trading on the stock market.
• Delayed economic data could increase market volatility.
• The upcoming US jobs report is causing anticipation and anxiety.
• Persistent fears about rising inflation.
• Investors shifting towards value stocks.

Stock investors could face a turbulent start to the week if concerns about artificial intelligence trading persist and are compounded by a backlog of economic data that raises worries about a weak labor market and stubbornly high inflation. U.S. stocks mostly fell Friday, with the three major indexes showing mixed performance. Thursday, despite the end of the longest government shutdown in history, the Dow Jones Industrial Average, the S&P 500, the Nasdaq Composite and the small-cap Russell 2000 all logged their worst performance in over a month.

One of the biggest questions facing investors now is whether there is room for further selling in the stock market, and how the backlog of economic data will be interpreted after it is released in the coming days. There is no consensus in the market on either of these factors. The data may be seen as outdated due to the 43-day shutdown delay, and AI trading may regain support, as happened during Friday's trading session. Both scenarios are possible.

“It’s unclear at this point how much weight the market will give to a single data point,” said Gennadiy Goldberg, head of U.S. rates strategy in New York at TD Securities, who focuses on the bond market. Market participants “will still watch the data, but the degree to which they care might be significantly less because they think more updated, more timely data is on the way.”

September Jobs Report and Inflation Concerns Loom

The official U.S. nonfarm payrolls report for September will finally be released on Thursday, more than a month behind its original Oct. 3 release date. But Goldberg said the report may not have the same impact on the market as it has in the past. The reason is that the November nonfarm payrolls data is scheduled to be released on Dec. 5, ahead of the Federal Reserve’s Dec. 9-10 policy meeting—although the TD Securities strategist added that this may require confirmation from the U.S. Bureau of Labor Statistics to ensure that the November jobs report will not be delayed or affected by the now-ended shutdown.

David Russell, global head of market strategy at TradeNation, an online brokerage based in Florida, has a different view. He believes that the release of delayed data could lead to significant market volatility, and the data could be interpreted by the market as ignoring any positive trends and focusing more on evidence of a struggling labor market.

“No matter what the data is, it will probably be interpreted negatively, because people will say our economy is still weak, labor market growth is slow, and inflation is above target,” Russell said in a phone interview. “Before the past week, the market had digested a lot of very positive results, and that optimism is likely to continue to fade,” he said. “Arguably, without AI or data center investment, our economy may have already been in recession.”

Russell added that if the market starts to believe that investment in AI will slow, then “the market will price in economic weakness long before the data confirms it.” It remains unclear when the October nonfarm payrolls data and the consumer price index (CPI) data will be released. The release of the October CPI data, originally scheduled for Nov. 13, has been disrupted by data collection issues. Meanwhile, Kevin Hassett, one of President Trump’s senior economic advisers, has said that the official October jobs report, originally scheduled for Nov. 7, will eventually be released, but will not include data on the unemployment rate. The U.S. Bureau of Labor Statistics has provided a link for updates to the public on the revised data analysis release dates.

Unofficial employment reports recently released by payroll processing firm ADP and Challenger, Gray & Christmas have shown that the labor market is in poor condition. As a result, BMO Capital Markets strategists Ian Lyngen, Vail Hartman and Delaney Choi said in a report: “Intuitively, strong jobs added figures in September will be downplayed as stale information from before the shutdown, while weak data will be seen as a more relevant indicator of a softening labor market prior to Oct. 1.”

One of the few government data releases during the shutdown was the September CPI report, released in late October. The report showed that the overall annual inflation rate rose to 3%, raising concerns about future price increases.

Investors Turn to Value Stocks

Last week, investors turned to value stocks, moving away from growth stocks with high price-to-earnings ratios. This pushed the Dow Jones to break through 48,000 on Wednesday, hitting an all-time high, and close at a record high for the second consecutive trading day.

UnitedHealth Group Inc. was among the biggest gainers in the Dow. But Russell said that the strong performance of the blue-chip index leader is not necessarily a good sign, as the healthcare sector “is fundamentally a safe-haven sector.”

Jim Baird, chief investment officer at Plante Moran Financial Advisors in Michigan, said he recommends that investors stick to a long-term asset allocation plan that can be strategically executed to avoid taking unnecessary risks to achieve goals, and not overreact to market volatility. Plante Moran manages $23.1 billion in assets as of June 30.

In Baird’s view, the core issue of last week’s stock market sell-off “is whether this is a one-off event or a turning point in market sentiment. At the moment, we have no way of knowing.” “Previously, expectations of interest rate cuts by the Federal Reserve drove positive sentiment in the market, and we also experienced a generally positive earnings season,” Baird said. “But most of these have now become a thing of the past, and with the government back up and running, people are beginning to question the validity of the economic data that was put on hold during the shutdown.”

He added: “This leaves investors puzzled, full of questions about the short-term outlook and the next catalyst for the market’s direction. At the same time, we have little economic data available, and there is uncertainty about the new data that the government will release in the coming weeks.”

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