Last Friday, the S&P 500 Index (SP: .INX) fell sharply as investors digested a dismal jobs report.
The S&P 500 Index fell 1.6% to 6,238, while the Nasdaq Composite Index (NASDAQ: .IXIC) closed 2.2% lower at 20,650 points.
Economic data showed that just 73,000 jobs were added in July, significantly lower than the 110,000 predicted. The unemployment rate also increased to 4.2%.
However, perhaps the most surprising revelation was revisions made to prior months. Specifically, it was also revealed that payrolls in May and June had been revised lower by 258,000.
That means that employment growth has averaged just 35,000 over the past three months, the worst track record since the pandemic.
With inflation expected to increase in the coming months due to tariffs, this has raised concerns of 'stagflation', according to Bank of America.
Slagflation occurs when there is persistently high inflation combined with rising unemployment.
This raises additional complexities for the Federal Reserve in setting monetary policy.
Chairman Jerome Powell has been subjected to increasing political pressure to cut rates.
The Federal Reserve's two primary goals are maximum employment and stable prices.
If this jobs trajectory continues, unemployment will likely rise further. A rate cut may be needed to return to maximum unemployment. However, it may also worsen inflation, which is contrary to the Fed's second goal.
Stocks tumble on Friday
After this news was released, major indices fell sharply.
The jobs report release coincided with several prominent earnings announcements.
This earnings season, certain magnificent seven stocks have fared better than others.
Last week, Meta Platforms Inc (NASDAQ: META) and Microsoft Corp (NASDAQ: MSFT) rose 11% and 8% respectively, after delivering better-than-expected earnings results.
However, Amazon Inc (NASDAQ: AMZN) declined 8% after revealing weaker-than-expected profit guidance.
ASX ETFs in the firing line
Several ASX exchange-traded funds (ETFs) that track the US market have opened lower today.
At the time of writing, both the iShares S&P 500 AUD ETF (ASX: IVV) and the Vanguard US Total Market Shares Index AUD ETF (ASX: VTS) are trading 1.7% lower.
Given this sharp decline, investors may be wondering whether the 'sell America' trade is back. This phrase was originally coined back in April when US stocks were heavily sold off as part of the initial reaction to Trump's tariffs.
While it's too early to say whether there will be a sharp sell-off, it's always a good idea for investors to have a game plan surrounding risk management.
Time to sell or a buying opportunity?
Those with exposure to US stocks or US-focused ETFs may be wondering what to do with their holdings.
While there's no denying that the latest jobs report was unfavourable, major decisions should not be made on one macroeconomic data point alone.
However, it may be reasonable for those with high allocations to US stocks and ETFs to consider reducing their positions. Investors in this position may wish to consider diversifying internationally. For example, investors could swap some Vanguard US Total Market Shares Index AUD ETF shares for Vanguard MSCI Index International Shares ETF (ASX: VGS) shares. While VTS contains US stocks only, VGS is geographically diversified.
On the other hand, should the US market decline further, this may present a buying opportunity for those looking to get into the US market through individual stocks or ASX ETFs.
