Following a terrifying morning decline, the S&P 500 Index finished Monday 3% lower, down 106 points. Meanwhile, the technology-heavy Nasdaq composite dropped 3.43%, and the Dow Jones fell more than 1,000 points, or 2.6%, as fears of a potential recession in the largest economy in the world caused global markets to erupt.
The Dow and the S&P 500 experienced their largest declines since September 2022. Nasdaq’s market value dropped $907 billion as a result of the market chaos.
Neil Shearing, group chief economist at Capital Economics, wrote in a commentary, “So much for the summer lull.” “Bond yields have fallen and stock markets are in chaos as fears of a U.S. recession have grown.”
Sharp drops in tech stocks—such as Nvidia, Apple, and Amazon—as well as a dismal jobs report are what’s causing the selloff. With a 4.82% loss, Apple experienced its worst day since September 2022. Mortgage rates dropped as investors rushed to purchase US Treasurys, allowing some borrowers to refinance, according to experts.
Biden mum on stock market rout, while Trump attacks
Instead of directly addressing the market panic on Monday, President Joe Biden issued a statement praising the expansion of college Pell grants and his student loan forgiveness program.
As Donald Trump and his allies worked nonstop to blame Vice President Kamala Harris, the Democratic presidential nominee, and Vice President Joe Biden for the stock market debacle, the White House remained silent.
Biden made a statement on X that seemed to be directed at younger voters, as the tech-heavy Nasdaq index lost more than $900 billion in value and the Dow Jones average dropped more than 1,000 points.
The statement read, “In three years, my Administration fixed Income-Driven Repayment so borrowers get the relief they are entitled to, made the largest increases to the Pell Grant in a decade, and canceled student debt for nearly 5 million borrowers through various actions.” “I’m not finished yet.”
Trump took great pleasure in calling the day’s defeats the “Kamala Krash.” Record stock market highs were attributed to the former president earlier this year, who claimed that they were an indication that investors supported his bid to win back the White House.
What does Chicago Fed President Goolsbee say about rate cuts?
Chicago Federal Reserve President Austan Goolsbee stressed in an interview with that the Federal Reserve is legally mandated to do two things: stabilize prices and maximize employment.
He stated, “That is the dual mandate.” That is the factor that will dictate the Fed’s actions regarding rates. The Fed’s mandate contains no directive to halt market declines. Alternatively, maintain traders’ profits during days of volatility, is that correct?
“It is the Fed’s responsibility to act if the economy begins to deteriorate, and we will act appropriately,” he declared.
What does Goolsbee say about the jobs report?
Goolsbee acknowledged the jobs report was “negative,” but he pointed out that the data was limited to a single month. Although the 114,000 increase in payrolls fell short of the average estimate of 175,000 economists, he said that was still within the error margin, which is plus or minus 100,000.
He stated, “The central bank’s role is to be steadfast and consider all available information when making decisions.” In other words, although this jobs report was negative when you got right into it, there were some cross-currents that made it less obvious. For example, the employment to population ratio and the labor participation rate both increased, which is somewhat unusual, even though the unemployment rate increased more than people had anticipated. Recessionary indicators typically appear when the unemployment rate rises as a result of an increase in layoffs.
It might be time to reevaluate those rates, according to Goolsbee, who also noted that “the Fed set the rate at the level it is now a year ago, and the conditions were very different a year ago than they are today.” At a 23-year high, the Fed funds target rate is currently between 5.25% and 5.5%.
He stated, “You want to be that restrictive only if you are afraid of an overheating of the economy.” “And the thing is, this isn’t how overheating actually looks.”
How likely is a recession?
While some economists are downplaying worries, others argue that the state of the market increases the likelihood of a recession within the next 12 months.
“The concerns about a recession are exaggerated,” Wells Fargo senior global market strategist Scott Wren stated. “This is not the time to panic.”
Economists at Wells Fargo stated that they anticipate a slowdown in the economy rather than a recession, pointing out that the labor market is still weakening and “some distance away from even the most moderate, modern recession,” which occurred in 2001. The bank also pointed out that as household purchasing power increases, consumer spending may rise.
According to Bloomberg, Goldman Sachs Group increased the likelihood of a recession within the next year from 15% to 25% on Sunday, but they still view the risk as “limited.”
The Sahm rule, which states that if unemployment based on a three-month average rises by at least a half percentage point over the previous 12 months, the country is likely in a recession, is one of the factors contributing to recession concerns. This rule was set in motion by the July job report.
Former Federal Reserve economist Claudia Sahm issued a warning in the wake of the COVID-19 pandemic not to read too much into her namesake rule. “It is extremely unlikely that we are in a recession,” she said to Bloomberg Television, but “we’re getting uncomfortably close to that situation.”
One of the most crucial questions is: where are we going? stated Sahm. Furthermore, it does not appear that the changes in the employment rate that the Sahm rule detects are encouraging. They’re moving in the wrong direction, and we could run into problems because of that momentum.”
Why is Japan’s yen gaining on the U.S. dollar?
On Monday, as investors balanced the likelihood of more aggressive rate cuts by the Federal Reserve against higher rates in Japan, the yen reached a seven-month high versus the dollar.
In the event that the Fed lowers rates while Japan raises them, traders will probably try to buy yen to keep up with the rate movement and sell the dollar for higher returns.
After the Bank of Japan unexpectedly raised its short-term policy rate last Wednesday from 0.05% to 0.25% and hinted at further increases, the yen had already begun to rise.
Fears of a recession were stoked when the Labor Department revealed weaker-than-expected job growth for July and a spike in the unemployment rate to 4.3%. This gave the Japanese currency another boost.
According to reports, other traders were also unwinding the carry trade due to rising Japanese rates. Investing in lower-yielding assets abroad while taking out low-interest loans in yen is known as a carry trade.
The carry trade loses money when Japanese interest rates rise, which prompts investors to sell their higher-yielding assets and repurchase yen, which raises the currency’s value.
On Monday, the Nikkei index in Japan reached a seven-year low.
What’s a carry trade? And why is it linked to Monday’s turmoil?
Market watchers have been discussing a well-known transaction for months: investors borrowed money at extremely low interest rates in Japanese yen, which they then used to purchase high-growth stocks like the “Magnificent Seven” tech stocks—Apple, Amazon, Alphabet, Tesla, and Meta.
For weeks, worries regarding the carry trade had been growing, partly due to the massive sum of money involved – an estimated $4 trillion. When the Bank of Japan increased interest rates from 0.1% to 0.25% on July 31, those worries skyrocketed.
Naturally, that rate is still extremely low and doesn’t really matter for the carry trade in and of itself. However, traders noticed the implications as it was the bank’s biggest rate increase since 2007.
Due to the stronger yen compared to the dollar, traders had to spend more money in order to hold onto their “Magnificent Seven” stocks. As a result, many decided to sell, which contributed to the panic in the market.
Bitcoin suffered a massive sell-off.
In response to a frenzy of risk-averse asset sales on Monday, U.S.-listed shares of companies involved in the cryptocurrency space plummeted, and Bitcoin fell more than 15%.
The industry, which was up until recently experiencing optimism due to the approval of exchange-traded funds linked to the spot prices of the two largest cryptocurrencies, Bitcoin and Ether, is witnessing a startling reversal as a result of the plunge.
A pro-crypto speech made by Republican presidential candidate Donald Trump last month at a bitcoin conference added to the optimism, but data indicating a decline in manufacturing and increased unemployment squeaked risky assets.
How much lower must the S&P 500 go today before circuit breakers trip?
Here are the three levels at which marketwide circuit breakers will be hit − and what happens if each one is breached:
- A 7% decrease, or 4,972.3 prior to 3:25 p.m. Unless level 3 is violated, trading is suspended for fifteen minutes before starting again.
- Decline of 13%, or 4,651.5, prior to 3:25 p.m. Trading stops for fifteen minutes, after which it resumes unless level 3 is violated..
- 20% decline, or at any point above 4,277.24: Trading is suspended for the duration of the day.
Only one daily activation of each circuit breaker is permitted. For instance, in the event of a Level 1 market decline, the Exchange would not halt trading until a Level 2 decline transpired, at which point it would reopen.
Where is this panic coming from?
For days, the fear in the market has been growing.
- The weekend saw the billionaire investment guru Warren Buffett spark rumors that he has lost interest in stocks after Berkshire Hathaway revealed that its cash position as of June 30 was $276.9 billion, up from $189 billion, following the sale of a sizable portion of its Apple stake.
- This heightened investors’ concerns that the economy might be contracting. The U.S. economy created just 114,000 new jobs in July, according to a Labor Department report released on Friday, and the unemployment rate increased to 4.3%.
- The most concerning development was the sharp increase in the unemployment rate, which set off what economists refer to as the Sahm rule, according to which the country is most likely in a recession if unemployment has increased by at least 0.5 percentage points during the previous 12 months. Since the 1970s, the rule has accurately predicted every recession in the United States.
Did the stock market crash today? What’s a ‘market correction’?
With a ton of financial jargon flying around the internet, today is turning into a wild one for retirees, homeowners, and investors. Here is a quick definition of some of the terms that describe the financial suffering:
- Correction. A market drop of at least 10% from a recent high, which typically occurs about once a year
- Pullback. When a specific stock or the market retreats 5% to 9.99% from a peak. While corrections may prompt some investors to reach for the Xanax, pullbacks can also be unnerving after long stretches of market calm. That said, pullbacks – which normally occur three to four times a year – are viewed as healthy and as buying opportunities.
- Volatility. How much a stock or the market fluctuates in a period of time.
- Bear market. When a stock or market index falls 20% or more.
- Bull market. A sustained rise in stock prices without a bear market, or a 20% drop.
