Dow falls by more than 600 points as September turns ugly

New York (CNN) — Wall Street kicked off the month of September with a bust, after a disappointing economic report dragged down the Dow by 626 points, or 1.5%, Tuesday afternoon.

The latest manufacturing report from the Institute for Supply Management showed a fifth-straight month of declines, fueling concern that aggressive rate hikes from the Federal Reserve have inflicted too much damage on the US economy.

Traders were already jittery ahead of a big month of economic news, from Friday’s key jobs report to next week’s inflation readings and then the long-awaited rate cut from the Fed mid-month.

Wall Street’s fear gauge, the VIX, rose, and the broader market also tumbled: The Nasdaq Composite ended the day with a loss of 3.3% as tech investors became skittish over AI darling Nvidia’s 9% plunge. Skepticism about the AI chipmaker’s valuation after a weak outlook last week continue to stoke fear, and questions are being raised about whether AI technology as a whole will help or hinder tech companies’ bottom lines.

Meanwhile, the benchmark S&P 500 closed about 2% lower.

September has historically been an ugly month for stocks, but Tuesday’s moves come after a similarly miserable start to August, when markets went into a tailspin: The S&P 500 sank more than 3%, the Dow lost 1,000 points and the Nasdaq Composite ventured further into correction territory. Investors were reacting to a weaker-than-expected jobs report that underscored fears that the Fed had mishandled inflation and pushed the economy right into a recession.

But markets soon corrected, ending the month with gains.

Still, concerns remain about the state of the labor market: “Recent softness, coupled with the recent substantial negative benchmark revisions subtracting more than 800k jobs in payrolls from April 2023 to March of this year, underscores downside risks for the economy,” said Mark Hamrick, senior economic analyst at Bankrate, in a note Tuesday.

Friday’s jobs report is arguably the most important piece of economic data that central bank officials will have to parse before their monetary policy meeting on September 17-18. A weak headline number coupled with a higher unemployment rate could push the Fed to roll out a jumbo, half-point rate cut to put the economy back on track. A softer number would mean a quarter-point hike. Either way, consumers and businesses are looking forward to any breathing room that lower interest rates will bring, in the form of less punishing loan rates, mortgage rates and other ways to borrow money.

Oil also dropped Tuesday as concerns rose about softening global demand. Oil cartel OPEC is expected to increase output next month despite outages in Libya. International benchmark Brent fell to $73.70 a barrel and US benchmark West Texas Intermediate closed at just above $70 a barrel.

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