Written by Matthew Johnson.

On Monday, fear about a slowing U.S. economy triggered a massive sell-off in financial markets worldwide. Wall Street wasn’t spared from this chaos. By morning, the S&P 500 had dropped 3.1%, following its worst week in over three months. The Dow Jones Industrial Average plunged 956 points, or 2.4%, and the Nasdaq composite slipped 4%.

This turmoil wasn’t confined to the U.S. Japan’s Nikkei 225 began Monday with a dramatic 12.4% drop, marking its worst day since the infamous Black Monday crash of 1987. This sharp decline was the first opportunity for Tokyo traders to react to Friday’s disappointing U.S. employment report. The data showed U.S. employers slowed their hiring far more than economists had anticipated, intensifying fears that the Federal Reserve’s high interest rates have throttled the economy too much in their bid to curb inflation.

In the midst of this financial whirlwind, President Joe Biden’s top economic advisor, Gene Sperling, announced his departure from the White House. Interestingly, he noted that he would be joining Vice President Kamala Harris’s campaign efforts instead.

Global Market Repercussions

The economic unease reverberated globally, with South Korea’s Kospi index plummeting 8.8%. European stock markets sank more than 2%, and even bitcoin took a 9.5% hit. Surprisingly, even gold, typically a safe haven during market upheavals, slipped 1.4%.

Traders are now speculating whether the Federal Reserve will need to cut interest rates in an emergency session before their next scheduled meeting on September 18. The yield on the two-year Treasury, closely tied to Fed expectations, fell to 3.81% from 3.88% on Friday and from 5% in April.

Brian Jacobsen, chief economist at Annex Wealth Management, commented, “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.” He added, “Those are usually reserved for emergencies, like COVID, and an unemployment rate of 4.3% doesn’t really seem like an emergency.”

Jacobsen also suggested that the Fed could stop shrinking its holdings of Treasurys and other bonds as a symbolic gesture to show they are aware of the current economic distress.

Tech Stocks Take a Beating

Despite some stabilization, U.S. stocks continued to suffer. The small companies in the Russell 2000 index fell 4.4%, quashing a recent revival. The Big Tech sector, which had been a major driver of market gains this year, also experienced significant losses. Apple, Nvidia, and other tech giants, dubbed the “Magnificent Seven,” saw their stock prices tumble as investor optimism waned.

Apple dropped 5% after Warren Buffett’s Berkshire Hathaway revealed it had reduced its stake in the company. Nvidia, central to Wall Street’s AI frenzy, fell 9.1% due to analysts lowering profit forecasts following a report of delays in their new AI chip. This dip reduced Nvidia’s annual gain to 97%, down from 170% in June.

Beyond corporate earnings and interest rates, geopolitical tensions are also influencing market sentiment. The Israel-Hamas conflict poses a risk of oil price volatility, adding to concerns about global instability. Additionally, the upcoming U.S. elections could further disrupt markets.

Our Take

This market turbulence highlights the risks of excessive economic manipulation by the Federal Reserve. Their high interest rates have led to a significant slowdown, affecting global markets and investor confidence. This is troubling for the public because such instability can lead to broader economic challenges, including job losses and reduced consumer spending. It’s imperative for the Fed to carefully balance their policies to avoid further economic distress.