Recession Fears — and More — Rock World Markets
Investors spooked by a weaker-than-expected jobs report on Friday sent global stock markets spiraling lower Monday, raising new questions about the strength of the U.S. economy and the Federal Reserve’s ability to achieve its goal of a “soft landing” from the pandemic-era inflationary surge.
Japan started the ball rolling downhill early on, with the Nikkei index plunging 12.4% for its worst one-day loss since Black Monday in 1987.
U.S. investors followed suit, sending the Dow Jones Industrial Average down by more than 1,000 points, or 2.6%, with the broader S&P 500 falling 160 points (3.0%) and the tech-heavy Nasdaq dropping 576 points (3.4%). It was the worst daily percentage loss for the Dow and the S&P since 2022. Crypto assets plummeted, as well, with Bitcoin tumbling about 9%. Interest rates also moved lower as investors plowed into safe assets, with the 10-year Treasury yield dropping to its lowest level in more than a year.
Market analysts listed multiple sources of concern driving the selloff. The weakening job market in the U.S. was cited as a potential recession signal, made more dire by the Federal Reserve’s decision to hold interest rates steady rather than cutting them at its meeting last week — a decision that came just days before surprisingly weak results for hiring in July. Investors have also been worried about tepid corporate earnings, which threaten to undermine sky-high valuations, and a runup in tech stocks driven by what some say is an unwarranted faith in the productive potential of artificial intelligence.
But the biggest factor could be the unwinding of the Japanese carry trade, in which investors borrow at low rates in Japan and invest at higher rates elsewhere. Rising interest rates in Japan and a strengthening of the yen are undermining that trade, causing ripples throughout the world as investors unwound their positions.
In the end, there was plenty of blame to go around. “It’s just a perfect storm of slowing growth, crowded positioning and risk-off sentiment that’s all coming to a head at the same time,” John Belton, portfolio manager at Gabelli Funds, told CNBC.
An overreaction? While they may have contributed to Monday’s big selloff, Wall Street traders are not the only ones with opinions about the economy. As University of Michigan economist Justin Wolfers told CNN, market participants are focused on the short-term ups and downs of the market. Economists, on the other hand, are more interested in things like wages, employment, incomes and spending. “And all of the actual data about the economy tell us that this is an economy that is currently doing pretty well,” Wolfers said.
Wolfers added that there are two ways to make sense of the split between markets plunging and an economy that appears to be in decent if not spectacular shape. “It could be that financial market guys are looking ahead and they see danger in the future that the rest of us can’t quite see,” he said. “Or it could be that for about the 400 millionth time they’re having a freakout, and it’s a big freakout, it’s a messy freakout, but it’s not one that fundamentally affects yours or my lives.”
RSM Chief Economist Joseph Brusuelas took a similar view, saying Monday’s market was “a good old-fashioned market panic” rather than a signal of recession. “This has little to do with that soft jobs report & has everything to do with the unwinding of massive leverage associated with the yen based carry trade,” he wrote. “The [Bank of Japan] & Fed are moving to normalize policy and the massive deleveraging associated with easy money is going through a period of adjustment. Private credit, commodities & oil will all have their days of adjustment going forward too.”
The longer-term view could influence the Fed to take a more cautious approach than some investors would like to see. “The Fed could ride in on a white horse to save the day with a big rate cut, but the case for an inter-meeting cut seems flimsy,” said Brian Jacobsen, chief economist at Annex Wealth Management, per the Associated Press. “Those are usually reserved for emergencies, like COVID, and an unemployment rate of 4.3% doesn’t really seem like an emergency.”
Investors are now betting that the Fed will cut rates by half a percentage point at its next meeting, in mid-September, rather than the 25 basis points previously expected. “They clearly made a mistake,” Mark Zandi, chief economist at Moody’s Analytics, told CNN. “That’s, now, I think, obvious to everyone — including them. And I think they’re going to respond” at their next meeting.
The politics of the plunge: Whatever the cause of the selloff, Republican presidential challenger Donald Trump wasted no time gloating about it and blaming Vice President Kamala Harris. “STOCK MARKETS CRASHING,” he wrote on his social network. “I TOLD YOU SO!!! KAMALA DOESN’T HAVE A CLUE. BIDEN IS SOUND ASLEEP. ALL CAUSED BY INEPT U.S. LEADERSHIP!”
Earlier this year, Trump attempted to take credit for the strong market performance, claiming that stocks were hitting record highs because investors were sure that he was going to win the election in November. But on Monday, he quickly denied any connection to the market, and instead raised the alarm about the “KAMALA CRASH.” He also warned of “THE GREAT DEPRESSION OF 2024!”
Sen. JD Vance, the Republican vice-presidential candidate, joined in, saying the selloff “could set off a real economic calamity around the globe” while questioning Harris’s ability to handle the situation.
The apocalyptic tone from the Republican nominees was too much for some observers. Wolfers, for one, pointed out how Monday’s big stock losses were relatively minor in the larger scheme of things. “The S&P 500 is down -3% so far today, or as I like to say, up only +9% so far through 2024, up +14% over the past twelve months, or +55% since Trump left office.”
Still, bad news in the stock market could hurt Harris as the election draws nearer, even as stocks remain fairly close to the record highs hit just a few weeks ago. Although the Trump campaign has stumbled in recent weeks with Harris riding a wave of enthusiasm, voters say they trust Trump more when it comes to the economy.