On Monday, August 5th 2024, the stock market experienced its most severe blip in nearly two years. The main U.S. stock indices, the Dow Jones Industrial Average, Nasdaq, and S&P 500, fell by 2.6%, 3.43%, and 3%, respectively. To put that into perspective, even Apple’s stock was rocked by a 5% decline after Warren Buffett's Berkshire Hathaway sold half of its Apple shares.
Here are some contributing factors to this recent market crash:
Rising Unemployment and Slower Job Growth As of early August, unemployment in the US was sitting at 4.3%, the highest since 2021. This triggered the Sahm Rule, a reliable recession indicator, which led to fears of a recession and subsequent large stock sell-offs over the following days.
Federal Reserve's Interest Rate Policies After the decision by the US Federal Reserve to maintain the interest rate range of 5.25%-5.50%, investors believed the Federal Reserve missed a crucial opportunity to cut the interest rate. This raised concerns over the economy’s stability and led to the global selling of shares.
Japan’s Interest Rate Hike Towards the end of July, the Bank of Japan raised its key interest rate to 0.25%, after a 17-year run of keeping it consistently between 0%-0.1%. With the US interest rates having remained unchanged, US investors involved in "carry trades" (borrowing in a cheaper, foreign currency to invest in assets) began to reverse their positions and sell off their shares.
Despite worries about the economy slowing down, the stock market recovered strongly on Tuesday, August 6th. The Dow Jones went up by 0.76% and both S&P 500 and the Nasdaq rose by around 1%, indicating that Monday’s sharp decline might have been an overreaction.
In conclusion, with the expected volatility of the market in general, investors should maintain caution for continued changes ahead. Savvy investors will be aware that markets tend to be volatile in the short term for various reasons. Many may opt to take a long-term approach in order to mitigate these short-term effects. When investing, your capital is at risk, the value of your investments may go up as well as down, and you may lose the entirety of your initial investment.
Sources | Further Reading
Barrett, J. (2024) Share market chaos explained: What’s behind the stock meltdown and will there be a recession?, The Guardian. Available at: https://www.theguardian.com/business/article/2024/aug/06/global-share-market-collapse-recession-nikkei-asx-nasdaq
Gregg, A. et al. (2024) Dow Falls more than 1,000 points in global market selloff - The Washington Post. Available at: https://www.washingtonpost.com/business/2024/08/05/japan-stock-market-crash/
Hakyung Kim, J.M. (2024) Dow tumbles 1,000 points, S&P 500 posts worst day since 2022 in global market sell-off: Live updates, CNBC. Available at: https://www.cnbc.com/2024/08/04/stock-market-today-live-updates.html
Hakyung Kim, S.S. (2024) Dow closes nearly 300 points higher to snap three-day losing run in broad relief rally: Live updates, CNBC. Available at: https://www.cnbc.com/2024/08/05/stock-market-today-live-updates.html
Jordan, D. and da Silva, J. (2024) US stock markets rise after days of turmoil, BBC News. Available at: https://www.bbc.co.uk/news/articles/c1d77xe2p26o
Kageyama, Y. and Kurtenbach, E. (2024) Bank of Japan raises its key interest rate, aiming to curb yen’s slide against the dollar, AP News. Available at: https://apnews.com/article/japan-economy-rates-boj-yen-e00919b053412fabf7a800ed78a9ad7a
Smith, C. (2024) S&P 500 rebounds to gain 1%. cooler heads prevail after Monday selloff., Barrons. Available at: https://www.barrons.com/livecoverage/stock-market-today-080624/card/s-p-500-rebounds-to-gain-1-cooler-heads-prevail-after-monday-selloff--pkvOiIuVhoQI7G1KLlzR
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