Japanese stock prices experienced the worst crash since 1987, and the reverberation caused markets across the globe to sell off on Monday. This follows the U.S. sell-off last week, which was caused by lower-than-expected job and unemployment numbers.
U.S. Jobs Report and Economic Concerns
Last week, investors pulled back after a poor jobs report revealed that employers reduced hiring in July. This worrisome recession indicator, coupled with the Japanese crash, has increased worries of a slowing U.S. economy.
Nikkei’s Significant Drop
On Monday, Japan’s Nikkei 224 dropped 12.4 percent, the worst crash of the Nikkei since the “Black Monday” crash in 1987. On Black Monday, stock markets worldwide crashed, and the Dow Jones Industrial Average dropped by 22.6 percent.
Response to U.S. Jobs Report
The Nikkei’s reaction on Monday was the first chance the Japanese traders had to react to the U.S. jobs report, which significantly underperformed expectations.
Impact of Bank of Japan’s Interest Rate Policy
Another factor in the Nikkei crash is the recent move of the Bank of Japan to end its zero interest rate policy and increase the interest rate, boosting the yen’s value but spooking investors who had borrowed money from Japan to spend elsewhere.
Concerns About Federal Reserve’s Actions
Investors in the U.S. last week and the Japanese today showed through their stock market activity that they are concerned that the Federal Reserve’s actions to curb inflation were too drastic and have potentially brought the economy to the brink of recession.
Global Market Repercussions
Other regional economies were also facing turmoil on Monday. South Korea’s Kospi index lost 8.8 percent, and bitcoin dropped by $7,000 from $61,000 to $54,000.
Gold’s Unexpected Decline
The value of gold, an ordinarily safe investment, dropped about one percent.
Speculation on Federal Reserve Rate Cuts
Part of the reason for the reaction is that traders consider that the Fed may have to cut interest rates in an emergency meeting rather than in late September, as the market had previously priced in.
Economists’ Perspectives on Market Instability
Chief Economist at Annex Wealth Management, Brian Jacobsen, said, “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. Those are usually reserved for emergencies, like COVID, and an unemployment rate of 4.3 percent doesn’t seem like an emergency.”
Overall Economy Remains Strong
Economists point out that while the market instability in the past week is troubling, the overall U.S. economy is growing, and the stock market still has solid wins for the year. They are not convinced a recession is on the way.
Interest Rate Concerns
Americans have been looking for recession indicators ever since the Fed started raising interest rates in March 2022 to combat inflation. If the rates rose too high and fast, it could trigger a recession.
Goldman Sachs’ Revised Recession Expectations
Goldman Sachs analyst David Mericle said his recession expectations rose from 15 percent to 25 percent following Friday’s jobs report. He said the increase is because “the data look fine overall” without “major financial imbalances.”
Market Corrections and AI Technology
Other investors believe that some of the drops came as stocks let off some steam after a blockbuster year or many all-time highs. JJ Kinahan from IG North America said, “Markets tend to move higher like they’re climbing stairs, and they go down like they’re falling out a window.”
He attributed some losses to the correction from over-promising AI technologies, which have proven transformational yet expensive to develop without commensurate profitability. Kinahan said that technology companies must demonstrate how AI can make money and that AI is a “market that was ahead of itself.”
