ISM Services Data Adds to Market Gloom, Stocks Tank

On October 3, the ISM (Institute of Supply Management) released its nonmanufacturing PMI (purchasing managers’ index) data—also known as the services PMI—which came in below market expectations. This discrepancy increased the market’s fear of a slowdown.

Before we discuss the services PMI in detail, let’s look at the market’s performance over the last few days and the effects of the latest economic data releases.

US stock markets

The Dow Jones Industrial Average (DIA) lost over 800 points on October 1 and October 2 after disappointing economic data reignited market fears about an economic downturn.

The S&P 500 (SPY) and the Nasdaq Composite (QQQ) have lost 2.9% and 2.5%, respectively, over the last two days. Today, the US markets opened in the green as they awaited the ISM nonmanufacturing PMI.

US ISM services PMI disappoints

The market’s worst fears came true as the data came in below economists’ expectations. The reading for the ISM US services PMI came in at 52.6, lower than the 55.1 economists expected. It was also the worst reading for the ISM services PMI since August 2016. The indicator was sharply down from August’s reading of 56.4.

According to ISM officials, “The non-manufacturing sector pulled back after reflecting strong growth in August. The respondents are mostly concerned about tariffs, labor resources and the direction of the economy.”

ISM manufacturing PMI contracted for second straight month

On October 1, the ISM released its manufacturing PMI data, which also came in at the worst level in more than a decade. It showed a contraction in the manufacturing sector for the second straight month. This reignited market fears that the US-China trade war has started to hit the manufacturing sector hard.

While investors were already worried about the slowing manufacturing sector, the worse-than-expected services PMI only added to slowdown fears.

US consumer confidence is also tanking

On September 24, the Conference Board released September’s Consumer Confidence Index reading, which came in at 125.1, below the market’s expectation of 133.5. According to the Conference Board’s Lynn Franco, “The escalation in trade and tariff tensions in late August appears to have rattled consumers.” Consumer spending contributes to more than two-thirds of US economic activity and has remained a bright spot despite increasing gloom elsewhere. Therefore, a worsening consumer sentiment doesn’t bode well for the US economy.

Markets dial back gains as gloom deepens

If we consider the context and the latest disappointing economic data, we’ll find that the market’s worries seem justified. After the ISM services data came out, the markets immediately dialed back their gains and turned negative. The trade war seems to have started hurting the services sector along with the manufacturing sector. Tariff-related uncertainty and rising labor costs are affecting companies’ supply chain decisions.

However, the market’s mentality that bad news is good news has continued as the S&P 500 has turned positive. Why? The odds of a Fed rate cut later this month have increased on this weaker economic data.

The worst performers

Among the market’s worst performers was Tesla (TSLA). It was down 5.8% at 11:10 AM ET today after it released its third-quarter deliveries data, which slightly underwhelmed expectations. GoPro (GPRO) was down more than 20% after it cut its 2019 forecast. Netflix and Amazon were down 2.25% and 0.4%, respectively, at 11:10 AM ET.

Now, the market is eagerly awaiting the US non-farm payroll data scheduled for release tomorrow. The data will give us another hint about the direction of the US economy.