Global markets are reeling, but economists say: Don’t panic yet

A sudden global panic is upending financial markets and cratering the value of stocks, currencies, even bitcoin - but economists say it’s not a surefire sign that the country is headed for a downturn.

The current sell-off, they say, is the result of investors having to untangle complicated, heavily leveraged trades that have artificially boosted stock values. A weak snapshot of the U.S. job market Friday added fuel to the fire, raising questions about whether the American economy is on rockier footing than previously thought and prompting bets that the Federal Reserve might have to cut interest rates sooner and more aggressively.

All three major stock indexes were down significantly Monday morning, by as much as 4 percent, as investors moved money out of equities and into bonds. Global markets were also reeling, with Japan’s Nikkei 225 plunging 12 percent, its largest one-day drop in nearly 40 years, after an interest rate hike by the Bank of Japan last week.

Although there’s a chance the turbulence could lead to a self-fulfilling economic slowdown, analysts and economists say it’s too soon to panic. The economy, by most measures, is still in solid shape, Americans are continuing to spend, and the stock market remains near the all-time highs it set recently.

“This is not the recession train; it’s just a good old-fashioned market panic,” said Joe Brusuelas, principal and chief economist for RSM US. “This is not a D.C.- inspired event, about a slowing job market or the Fed being behind the curve. It’s about a larger regime change, where investors are adjusting to the end of easy money globally.”

Japan for years has kept interest rates negative, making it attractive to borrow money against the yen to invest in higher-yielding assets such as tech stocks. But the Bank of Japan last week raised interest rates to 0.25 percent and suggested that it would continue doing so, causing the yen’s value to spike against the dollar and sending ripples throughout the global economy.

Most immediately, that has led to a sell-off of tech and artificial intelligence stocks, including darlings such as Apple and Nvidia, though analysts say it does not come entirely as a surprise, given repeated warnings about bloated valuations well before the Japanese central bank’s move.

“Investors have gotten so used to the stock market only going one way that now people are suddenly realizing, ‘Oh, stocks can also go down?’ ” said Torsten Slok, chief economist at Apollo Global Management. “This is a situation where one weak data point - Friday’s jobs numbers - brought the bears out of hibernation.”

Fresh data last week showed U.S. employers added 114,000 jobs in July, far fewer than expected. The unemployment rate, meanwhile, rose to 4.3 percent, its highest level in nearly three years, raising urgent questions about whether the Fed was keeping undue pressure on the economy and waiting too long to take its foot off the brakes.

The central bank last week decided to leave rates unchanged, saying it needed just a bit more time to see inflation keep falling before officials bring borrowing costs down from their highest level in 23 years. The overwhelming expectation then was that the Fed would finally cut rates at its next meeting in September, once central bankers were confident that inflation was on a reliable path down. (There’s no meeting scheduled for August.)

But lackluster jobs data, combined with the global sell-off, quickly changed the picture. By Monday morning’s sell-off, critics were not only concerned that the Fed would have to ramp up the size of its September rate cut but also wondering whether the bank might trigger an emergency move before then.

The bar for that kind of intervention is high: The last time Fed officials changed rates between official policy meetings was at the start of the pandemic, when the economy was in free fall. Plus, the constant refrain from central bankers is that they don’t react to a single data point or sudden jolt to the market. Rather, they are supposed to look through little ticks up or down and give enough time for the data to tell a comprehensive story.

Appearing on CNBC on Monday morning, Chicago Fed President Austan Goolsbee said the central bank’s role was to help the job market, keep prices stable and maintain financial stability - all with an eye to the future. So far, the economy has been able to not only withstand the Fed’s inflation fight but also stay strong overall, the stock slide notwithstanding.

“We’re forward-looking about it,” Goolsbee said. “So if the conditions collectively start coming in like that on the through line, there’s deterioration on any of those parts, we’re going to fix it.”

No matter what, the growing expectation is that the Fed is on a path to cut rates multiple times before the end of the year. Goldman Sachs predicts three cuts - one each at the bank’s remaining meetings in September, November and December. (The possibility of a November cut is particularly notable, since that meeting falls the week of the presidential election, when the Fed would typically be avoiding at all costs anything that might make political news.)

Still, economists caution that tanking global markets could set off a chain reaction that leads consumers and businesses to suddenly pull back, further slowing the economy.

“The economy is still strong,” said Slok of Apollo, “but if the stock market is about to enter a period of a 10 or 15 percent correction, there is indeed a risk this could spiral into a much worse situation.”