The week started calmly, with the Dow roughly unchanged at Wednesday’s close. But downbeat manufacturing data on Thursday kindled concerns about the strength of the U.S. economy, and Friday’s payrolls report caused them to burst into flame. The release showed that unemployment rose to 4.3% in July as the U.S. added 114,000 jobs, below the 175,000 expected. Job gains from prior months were adjusted downward, too. The Dow plunged 852 points on Friday, while the S&P fell 1.8%, and the Nasdaq dropped 2.4%, putting it in correction territory.

The economic concerns were real enough that investors went from quietly hoping the Federal Reserve would gradually start cutting interest rates in September to begging for big rate cuts now. On Friday, traders began to wager that the Fed will announce a 50-basis-point cut in September. Fed-funds futures suggest a 71.5% chance that rates will drop by that much, up from 22% before the jobs report. The last two times the Fed made cuts of greater than 25 basis points were at the start of Covid-19 and during the 2008-09 financial crisis.

“If this is the beginning of a turn in the economy for the worse, then all bets are off and the Fed will need to cut rates at a much bigger magnitude and frequency than they were indicating just two days ago,” wrote Chris Zaccarelli, chief investment officer for Independent Advisor Alliance in Charlotte, N.C.

If it were just the economy, the market might have handled it. But doubts about artificial intelligence are growing, denting microchip stocks and some companies spending big on the technology. Intel fell 26% on Friday after announcing that it would suspend its dividend and lay off 15,000 people. The company is an AI laggard and has fallen behind rivals in other computing areas, too. Amazon.com stock fell 8.8% after the company forecast more growth in AI spending when investors want evidence that spending is paying off.

There’s an emotional heat behind this selloff unlike anything seen in 2024. Stocks had risen steadily all year even after Fed rate cuts were delayed by warmer-than-expected inflation data. The delay didn’t hurt the rally because investors shifted bets to AI stocks, riding a surge in tech spending. Now, there are signs of panic. The Cboe Volatility Index, known as the “fear gauge,” jumped 70% on the week to near-extreme levels.

Sometimes, sharp drops can be buying opportunities. This time may be no different. But investors who step in immediately risk getting swept along in the panic. “The weight of the evidence in our work suggests that the bull market remains intact, but this pullback likely has a bit further to go in time and price,” says Keith Lerner, chief market strategist at Truist Advisory Services.

Sometimes it’s best to wade back in gradually instead of all at once.

Write to Avi Salzman at avi.salzman@barrons.com