Australia’s S&P/ASX 200 dropped 3.7%, Europe’s STOXX 600 fell 2.17%, and U.S. major indices sank over 2.5%. Why?
Global Market Declines: Some of these huge declines were driven by rising recession fears following a weaker-than-expected July jobs report. The U.S. economy added just 114,000 jobs in July, missing the forecasted 175,000 and falling short of June's 179,000 additions. The unemployment rate also rose to 4.3% from 4.1%, sparking concerns about economic stability. As most large companies are based in the US, and have a large consumer base there, the US markets drastically impact global stock values.
Earnings Performance: While 71% of S&P 500 companies exceeded Wall Street’s high earnings expectations, they did so by an average of just 2%, the smallest margin since Q4 2022. The year-over-year earnings growth rate was 11.5%. Although forward guidance has been strong, with 30% more companies offering above-consensus guidance, expectations may be too high for many companies to meet. According to Bob Elliott, Chief Investment Officer at Unlimited Funds, high expectations amid AI hype have inflated forecasts, leading to a correction.
Renewed Recession Concerns: Slowing consumer spending and the weak July jobs report have reignited recession fears. The rise in the unemployment rate triggered the Sahm Rule, a key recession indicator. This has led some to argue that Federal Reserve Chair Jerome Powell should have cut interest rates. These recession fears emerged after most Wall Street forecasters had previously dismissed such predictions for 2023.
Middle East Tensions: Markets have been rattled by increasing tensions in the Middle East. Iran, a significant oil producer, has threatened to expand the conflict in response to recent assassinations of senior Hamas and Hezbollah leaders. This potential escalation is testing investors' nerves and adding to global market volatility.
Unwinding of the Carry Trade: For years, Japan’s low interest rates made the "carry trade" popular, where investors borrowed in yen to invest in higher-yielding assets abroad. As Japan raises rates while the U.S. considers cuts, this trade is unwinding. Traders are closing positions, leading to selling pressure in U.S. markets. Hedge funds and investors had significantly reduced their bets against the yen, contributing to the selloff. However, as noted by Yardeni Research’s Eric Wallerstein, the carry trade was only one factor among many, including crowded trades in tech stocks and currencies, which all saw simultaneous declines.