Global Stock Markets Fall Sharply Amid Fears of Slowing U.S. Growth
Anxiety over a slowdown in the U.S. economy intensified on Monday, with a retreat in markets that began last week snowballing into a global rout.
The turmoil was the latest example of how distinct economic forces can ricochet across markets, forcing down company stock prices and erasing billions of dollars in value. In this case, a rapidly rising yen over the past week had disrupted the flow of global capital, prompting a pullback from some popular investments.
But the sell-off quickly expanded into a more widespread panic that the Federal Reserve may have waited too long to start cutting interest rates, threatening the strength of the U.S. economy.
Those fears were amplified by a U.S. employment report released on Friday that showed significantly slower hiring by employers, with the unemployment rate rising to its highest level in nearly three years. From the moment stock markets first opened for trading in Asia, and then through trading hours in Europe and the United States on Monday, prices plummeted.
On Wall Street, the S&P 500 fell 3 percent, its sharpest daily decline since September 2022.
While some investors saw the sell-off as a signal that the economy was at risk of recession, others maintained that the move was more the result of a pullback from overextended bets, especially on tech stocks and artificial intelligence. Despite its recent decline, the S&P 500 is still up nearly 9 percent for the year, a healthy return.
“Markets are a little bit out of control,” said Andrew Brenner, head of international fixed income at National Alliance Securities. “This is just total panic. It’s not real but it is painful, and it could be with us for a few weeks.”
Few corners of the financial market were spared from the turmoil as investors cashed out and sought refuge from a broad-based slump. Oil futures, gold and cryptocurrencies were also swept up in the turmoil. A number of big technology stocks — which have sway over the market because of their size — tumbled, and the tech-heavy Nasdaq Composite index fell about 3.4 percent. In Europe, the pan-European Stoxx index fell 2.2 percent.
The moves were a sharp reversal in major stock markets, which for much of the past year have risen to new heights, propelled by optimism about cooling inflation, solid labor markets and the promise of A.I. technology. The turmoil also came during the usual summer lull in trading volumes, which can lead to abrupt and severe swings in prices.
The selling was especially pronounced in Japan, where worries about the state of the economy there were compounded by concerns about the effects of a rapidly strengthening yen. The Nikkei 225 index dropped 12.4 percent on Monday, the benchmark index’s biggest one-day point decline, larger than the plunge during the Black Monday crash in October 1987.
The prognosis is bleaker for Japan, said Jesper Koll, a director at financial services firm Monex Group, because a strengthening yen will be a drag on corporate profits, especially for big companies that rely on selling abroad. He said that investors would usually swoop in to pick up stocks when prices fell significantly, but that “what is concerning is that we are not seeing buyers.”
A stronger yen also undercut some global investments made when the currency was cheaper, acting as a catalyst to wider selling across markets already nervous that stock prices had risen too high, too quickly. A popular trade among some investors involved borrowing in yen, and then investing it in markets like the U.S. But as the strength of the dollar this year began to turn around, profits from that trade also started to reverse course.
The fear for some investors is that the sell-off could begin to feed on itself, as selling leads to margin calls — where investors are required to post more cash to cover losing trades made with borrowed money — and margin calls lead to more selling as investors raise cash to cover what they owe.
But there are also reasons for investors to see through the latest bout of panic. And even as stocks tumbled on Monday, some economic data continued to paint a picture of an economy in expansion, helping to slow the sell-off in the afternoon from the quicker pace in the morning. Friday’s jobs report too — though weaker than predicted — showed that hiring continues at a pace that’s quick enough to absorb workers entering the labor market.
“This seems like an overreaction, especially given the limited economic data and Fed communication expected this week,” Greg Daco, chief economist at the accounting firm EY, wrote in a note to clients, referring to the market meltdown.
Austan Goolsbee, the president of the Federal Reserve Bank of Chicago, also suggested that the market sell-off was an overreaction to the most recent U.S. jobs report. But he did acknowledge that slowdown in labor data had been concerning.
“There are some cautionary indicators on the real side of the economy,” he said.
Economists are increasingly worried that the Fed is behind the curve in cutting interest rates and will have to cut borrowing costs swiftly as it scrambles to prevent the economy from deteriorating further.
Investors are betting on a supersized half-point rate cut at the Fed’s next meeting on Sept. 17-18, rather than a standard quarter-point cut. Some even predicted that the Fed could cut rates before that, in an emergency unscheduled meeting.
Careful Fed watchers pushed back on that idea, noting that central bankers usually reserve emergency cuts for moments when markets are in chaos and not functioning properly.
Economists do expect Fed policymakers to cut rates swiftly once they get started. “You only want to be this tight as long as you have to be,” Mr. Goolsbee said, explaining that keeping rates too high as inflation cools could put the job market at risk.
Monday’s turmoil also became a factor in the rancorous U.S. presidential race, with former President Donald J. Trump turning it into a political weapon. “Stock markets are crashing, jobs numbers are terrible, we are heading to World War III, and we have two of the most incompetent ‘leaders’ in history,” he wrote in a post on Truth Social on Monday.
The post underscored Mr. Trump’s longstanding fixation on stock indexes as a barometer of economic health, and reinforced the degree to which economic messaging will play a key role in the sprint finish ahead of the vote in November.
Vice President Kamala Harris, the presumptive Democratic nominee, has stressed economic optimism in speeches. “We believe in a future that keeps America’s economy the strongest in the world,” she said in Houston this month. But many Democrats worry that the Fed, by holding rates steady, may have hurt Ms. Harris by opening the door for the market sell-off.
Even before the U.S. labor-market data came out last week, global investors were jittery because the stocks had been on a record-breaking streak, said Jordi Basco Carrera, the lead investment strategist at Allianz in Munich: “In mind of every investor is, ‘How long can this last?’”
Despite the upheaval on Monday, “there is no clear signal that we are in a market bubble crash or the market is bursting,” he said. “For the time being, I think that it’s a healthy correction.”
Reporting was contributed by John Liu from Seoul, Melissa Eddy from Berlin, Jeanna Smialek and Jim Tankersley from Washington, and Danielle Kaye and Lydia DePillis from New York.
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