CNN
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Fear has entered Wall Street, and stocks are having another miserable day.
The Dow fell more than a thousand points at the open, and the broader market fell 3% Monday. The Nasdaq, loaded with risky tech stocks, fell 3.7%.
All these come within the global market sales. Japan’s Nikkei 225 index fell 12% – its worst performance in history. All major markets in Asia and Europe fell sharply on Monday.
Three fears emerged all at once to send markets on Monday: Growing worries about a recession, worries that the Federal Reserve has failed to act quickly and the belief that big bets on AIs may not pay.
The most prominent is the fear that the US economy is in much worse shape than previously believed – evidenced by Friday’s unexpected rise in the unemployment rate.
On Friday, the Bureau of Labor Statistics reported that the US economy added just 114,000 jobs in July – far fewer than expected – and the unemployment rate rose to 4.3%. While that’s not an unhealthy unemployment rate, its sudden spike is alarming: Last year, the unemployment rate was the lowest it’s been since the moon arrived.
To be clear: The US economy is still strong. Last quarter, it grew more than expected, boosted by strong consumer spending, which accounts for more than two-thirds of all domestic products.
But fears of a recession are growing. Goldman Sachs economists on Monday raised the odds of a recession to one in four in the next 12 months. It is still a “relative case”, because economic data looks strong overall and the Fed has enough room to cut rates from 23-year highs.
But Goldman’s odds of a collapse are still 10 percent higher than they were before Friday’s jobs report, which he called “more likely now.”
The stock market has had report after report this year, buoyed by falling inflation and growing sentiment that the Fed will end its string of aggressive rate hikes and begin reducing the rate, which can increase the profit of the business.
But the Fed did not cut rates as many had hoped last week. The market still sees the Fed’s impatience as a mistake.
The Fed is notorious for timing rate cuts and hikes. It was behind the flow of inflation and had to hold a historic rate hike in 2022 to lower prices. Similarly, some economists believe the Fed should have started cutting rates sooner.
Lowering rates can help support the labor market by reducing the cost of borrowing for businesses and freeing up money that companies can use to hire. But policy decisions take time to work in the economy. With inflation falling sharply in recent months and the unemployment rate rising, some fear the Fed may be too late to act before slow hiring turns into widespread unemployment.
The next Fed meetings are scheduled for September, November and December, Citigroup and JPMorgan analysts predict that the Fed will cut rates by half a point at its next two meetings. But that may be too late. It may be forced to cut the emergency rate earlier than that — a dramatic entry that the market is seeing as a possibility, according to CME’s FedWatch tool.
An emergency rate cut — unprecedented since the early days of Covid — is exactly what the Fed needs to do, noted Wharton finance professor Jeremy Siegel on CNBC Monday morning.
“It’s too far behind the curve now. I mean the Fed is up in the bleachers,” Siegel said. “You look at the data; it’s not comforting at all.”
Stocks were also flying high in the last two years due to big bets on technology companies involved in artificial intelligence: Many hoped that AI would create another industrial revolution in the world in width.
But the benefits of AI aren’t really there, and the unproven technology isn’t ready for prime time. Some fear it will never get there. Traders are starting to sell off major stocks in Apple, Nvidia, Microsoft, Meta, Amazon, Alphabet and other tech companies that have been on the rise since the beginning of last year.
Warren Buffett – CEO of Berkshire Hathaway and famous quiet force when the markets go haywire – is also discounting technology. He recently sold half of Berkshire’s Apple stake, a worrying sign for the tech sector’s health.
Because those companies each have a market capitalization of $1 trillion or more and make up a large portion of the value of the S&P 500, when investors sell technology stocks, which have and a very negative impact on the broader market.
Investors are running for the hills. They sell oil, crypto, and mostly technology. Instead, they poured into safe havens like bonds, sending Treasury yields lower.
That could cause problems for some retirees’ accounts. But people nearing retirement can benefit if they have a heavy mix of bonds, which benefit from flight to safety.
Lower rates, if the Fed follows a tapering pattern, could help lower higher mortgage rates, car loan rates and other consumer credit costs. However, it may mean that people with money saved in savings accounts may offer less interest in the coming months.
One thing you should never do: panic. This is not market crash. However, this is not the case. Investors are nervous, but not panicking. Monday’s trend, if it ends at current levels, would not break the worst 100 days in market history.
The only question now: How long will this fear last before investors see an opportunity to buy?
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