Financial markets around the world are in free fall. Here’s what you need to know about how we got here
NEW YORK — Markets on Wall Street and around the world are in a mini-panicInvestors worried about a slowing U.S. economy sent the Japanese market to its worst day in decades and shaved billions off the stock market value of some of the world’s biggest technology companies. had a relatively quiet year on the markets on his head.
For most of the year, investors around the world have been driving stock markets higher, convinced that central banks are managing, if with difficulty, to control inflation, and buoyed by the health of the U.S. economy and the promise of artificial intelligence.
That confidence has taken a hit in recent days. Readings are weak on the the job marketLast week, manufacturing and construction activity sparked concerns about a slowdown in the U.S. economy and criticism that the Federal Reserve waited too long to cut rates. The Bank of Japan raised its ratescausing turbulence in Japanese markets. On Monday, the Nikkei fell by more than 12%its biggest drop since 1987.
Investors are now heeding warnings that Apple, Nvidia and other Big Tech stocks have become too expensive. On Friday, the The tech-heavy Nasdaq Composite Index correcteddown 10% from its recent high. It fell another 3.4% on Monday.
U.S. traders are betting on a rate cut by the Federal Reserve of half a percentage point in September instead of the usual quarter point. Some are calling for an emergency rate cut. The biggest selling has been by small businesses that make most, if not all, of their sales and profits in the United States. Prices of oil and other commodities have fallen on economic concerns.
Some, however, believe that the decline is a good thing, as stock prices have risen too much. For individual investors, this is not the time to make hasty decisions, but rather to ensure that their investments are well diversified, experts say.
Here’s a look at what’s causing the market turmoil:
Beginning in 2002, the Fed quickly raised interest rates to combat rising inflation. It held its benchmark rate at 5.4 percent for about a year. As part of its fight against inflation, the Fed also sought to calm a swollen labor market.
Investors thought the Fed and other central banks were on track, even though inflation remained slightly above their targets (2% in the Fed’s case). The European Central Bank and the Bank of England cut rates once, and the Fed signaled it was ready to start cutting rates in September.
Despite some signs of slowing, the U.S. economy continued to grow despite higher interest rates, outperforming Europe and Asia. Then came last week’s economic reports.
The disappointing manufacturing and construction figures were followed by the government’s monthly labor market report, which showed a significant slowdown in hiring by U.S. employers. Fears that the Fed may have held back the economy for too long spread through markets.
A handful of technology stocks helped lead the market’s double-digit gain in July. But their momentum shifted last month as investors worried that their prices were too high and that expectations for profit gains had become too difficult to meet — a view that gained momentum after the group’s recent earnings reports were mostly disappointing.
Apple fell more than 5% on Monday after Warren Buffett’s fund Berkshire Hathaway revealed it had reduced its participation at the iPhone maker. Nvidia lost more than $420 billion in stock value from Thursday to Monday. Overall, the S tech sector&The P 500 was the biggest drag on the market on Monday.
The Nikkei suffered its worst two-day drop in history, falling 18.2% on Friday and Monday. One of the catalysts for the outsized surge was the Bank of Japan’s interest rate hike last week.
The BoJ rate hike has had an impact on what are known as carry trades. Investors borrow money from a country with low interest rates and a relatively weak currency, such as Japan, and invest the money in countries that will earn them a high return. Higher interest rates, combined with a stronger Japanese yen, may have forced investors to sell stocks to repay those loans.
The prevailing wisdom is: stand firm.
Experts and analysts encourage taking a long-term view, especially for investors concerned about their retirement savings.
“More often than not, panic selling on a red day is usually a great way to lose more money than you save,” said Jacob Channel, senior economist at LendingTree, who reminds investors that markets have recovered from worse selloffs than the current one.
As of 4 p.m. Monday, the price of the world’s largest cryptocurrency was just above $54,000, down from nearly $68,000 a week ago, according to data from CoinMarketCap.
While bitcoin served as a safe haven during the worst of the pandemic, it mostly behaves like any other risky asset that investors avoid during market downturns.
Greg McBride, a financial analyst at Bankrate, points out that a 10% market decline occurs on average once every 12 months.&The P 500 is down about 8.5% from its recent peak.
Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, says investors should wait and see how the recent turmoil plays out.
“It remains to be seen whether this recent labor market weakness is the canary in the coal mine (in which case selling is warranted) or whether it is simply a temporary cooling in the labor market (in which case it will prove to be another buying opportunity),” he wrote in a note to clients Monday.
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Cora Lewis and Wyatte Grantham-Philips in New York contributed to this report.
