Monday’s market selloff could prompt the Federal Reserve to act quickly to salvage the situation.
Investors woke up to one of the worst market days in years, with indexes around the world dropping at a worrying pace. In some cases, the fall was the worst since the 2008 financial crisis. In others, it was worse.
The global market slowdown was caused by reigniting fears of a US recession after the Federal Reserve kept interest rates stable last week. The market reaction was so worrying that speculation rose the Fed could summon an emergency meeting to cut rates immediately.
The Nikkei in Tokyo, the first major stock exchange to open, dropped 12.40% today, the worst fall since 1987. South Korea’s KOSPI followed soon after with an 8.77% fall.
The STOXX Europe 600, the Amsterdam Stock Exchange, and the London FTSE 100 fell by 2.45%, 2.69%, and 2.40% respectively. The stock exchanges in Paris and Milan will close in red too.
Then, the market day in the United States began. At the moment of writing, the Dow Jones is down by 2.69%, the S&P 500 by 3.32%, and the NASDAQ 100 by 3.68%. Many big tech stocks, including Apple and Nvidia, are down 5% or more.
Even Bitcoin and gold, whose trade is usually detached from stock exchanges, dropped by 8.57% and 2% respectively.
Will the Fed act on the drop?
Markets began the massive selloff following the Fed’s July 31 decision to keep interest rates at their 23-year high of 5.25-5.5%. The next Fed meeting will be on September 18th, and investors price at 100% the chances of the first interest rate cut since the COVID-19 pandemic.
Investors were hit by the double wave of the Federal Reserve postponing its pivot to September and disappointing big tech earnings. The vast majority of the S&P 500’s growth was carried by tech giants heavily invested in AI development. The latest earnings cycle showed AI currently incurs high costs and relatively low margins, hence Wall Street’s disappointment.
Overall, however, the US economy is just fine. The Atlanta Fed expects GDP to grow 2% this quarter, and unemployment is still relatively low at 4.3%. Though unemployment has grown slightly in recent months, it started from its all-time low of 3.7%.
In other words, recession fears are mostly overblown. Goldman Sachs believes there’s only a 25% chance of a US recession. The current market selloff is most likely a correction from the overhype of previous months.
Therefore, it’s highly unlikely the Fed will summon an emergency meeting. In the past, the Fed did it for actual emergencies, like the COVID-19 Pandemic or the September 11th attacks. As Brian Jacobsen, chief economist at Annex Wealth Management put it, “An unemployment rate of 4.3% doesn’t really seem like an emergency.”
