Exciting times are brewing on Wall Street.
Stocks had been falling at alarming rates for several days, but things turned from alarming to alarming on Monday. At one point, the Dow Jones industrial average fell more than 1,200 points on a day when stock markets fell across the world. It closed down 1,034 points, or 2.6%.
Tech stocks have been hit particularly hard lately: The Nasdaq composite index momentarily fell more than 10% since the middle of last week on Monday, entering what economists euphemistically call “correction” territory.
The sudden pullback has shaken investors and raised questions about the fundamental health of the economy beyond financial markets.
And even when things got going, the window-rattling slump threatened to kill the political euphoria that had gripped Democrats since President Biden’s withdrawal and Vice President Kamala Harris’ emergence as the party’s standard-bearer.
So what happened and what might happen next? Here are history’s first draft answers to some important questions:
What is causing the current decline in US stock markets?
Economists point to several factors behind the sell-off. First, tech stocks were overextended, pushed beyond their fundamentals by the artificial intelligence craze, which is why the Nasdaq correction happened. Nvidia, Apple and Intel were among the big losers on Monday.
And Friday’s jobs report, which showed a sharp slowdown in hiring and unemployment in July, had investors — even those not deep in tech — on edge. It came on the heels of news that jobless claims, a proxy for layoffs, rose significantly in the final days of July.
The Fed’s reluctance to cut interest rates has made matters worse, slowing inflation as targeted but also hurting businesses and consumers.
Then there are the echoes from global markets. On Monday, Japan’s once-high-flying stocks took their worst hit since Black Monday in 1987. The huge losses were seen in part as a response to market declines and growing concerns in the U.S.
“This is an unfortunate series of events that has led to selling, selling, selling,” said Christopher Rupkey, chief economist at Fwdbonds, a research firm in New York.
How have stock markets in the US performed overall this year?
Despite Monday’s panic selling, stocks have been generally up for the year, with many up.
Both the broader Standard & Poor’s 500 and the Nasdaq are still up more than 9% from the start of the year. The Dow lags behind, up just 2.6% since Jan. 2.
Stocks are benefiting from strong corporate earnings, investor excitement about the growth and potential of artificial intelligence and the prospect of a Fed rate cut, said Mark Zandi, chief economist at Moody’s Analytics.
“This is still a routine correction right now,” Zandi said of the current turmoil, but added that the situation requires careful monitoring. “Things can take on a life of their own.”
Should I be worried about a recession?
Not yet, maybe never.
The classic definition of a recession is two consecutive quarters of declining gross domestic product. Most recently, second-quarter GDP was a robust 2.8% after adjusting for inflation.
Nearly every economist agrees that a recession is not possible unless job growth turns negative for an extended period of time. And the U.S. economy has not yet approached that point.
Employers have added jobs every month since January 2021, when the economy began to recover from the pandemic. Most recently in July, job growth fell short of expectations but was still solidly positive, with 114,000 new payroll hires.
“I don’t see the fundamentals for an economic downturn,” said Jack Ablin, chief investment officer and co-founder of Cresset Capital.
Can anything be done to stop the decline in stocks?
Some investors have called for the Fed to cut interest rates as a sort of emergency move ahead of its meeting scheduled for mid-September to calm the sell-off.
Fed officials have taken such steps before, for example during the pandemic and the Great Recession. But analysts are skeptical that policymakers will intervene unless markets continue to stumble badly; imposing an immediate cut could make things worse by scaring people and causing a market crash.
“This is definitely not a very frustrating moment,” Zandi said.
What are the risks next?
With more people nervous about the economy, further declines in the stock market could erode confidence among businesses and consumers, leading to a pullback in hiring and spending. This would be a psychological boost, but economies are not immune to the fears or hopes of their human constituents.
Consumer spending, which drives the U.S. economy, has held up well in recent years thanks to steady job and wage growth, but there are signs from companies like McDonald’s and Starbucks that consumers are becoming more cautious.
High-income households account for a disproportionately large share of spending, supported by rising gains in housing and stock prices. A sharp decline in stocks would have the opposite effect, the so-called negative wealth effect, making wealthier households less willing to spend, which could lead to a recession.
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This story was first published in the Los Angeles Times.