Economic Collapse: Shares worldwide tumbled on Friday as investors panicked over signs of weakness in the U.S. economy.
The S&P 500 plunged by 2.5% in midday trading, poised for its worst day since 2022. The Dow Jones Industrial Average plummeted 954 points, or 2.4%, while the tech-heavy Nasdaq nosedived 3.2%, extending its losses to more than 10% from a record high on July 11.
The market meltdown was triggered by a grim jobs report released Friday morning, showing a spike in unemployment to the highest level since October 2021. This alarming data suggests the U.S. economy is faltering, heightening fears of an imminent recession. Prior to the U.S. market opening, European, Chinese, and Japanese markets had already plunged, reflecting the global scale of the economic distress.
Economists now assert that the Federal Reserve must slash interest rates much more swiftly than previously planned to stave off a severe recession. This sentiment follows a string of disappointing economic reports on Thursday, which had already sent U.S. indices spiraling downward.
The sell-off has dealt a heavy blow to Americans’ retirement savings, as 401(k) plans are heavily invested in stocks. However, the bleak economic outlook also increases the likelihood that the Federal Reserve will implement significant interest rate cuts in September, with potential further reductions before the end of the year.
Major financial institutions like JPMorgan, Citi, Bank of America, and Goldman Sachs have revised their forecasts, now anticipating two half-point cuts in September and November, followed by a quarter-point reduction in December. This would amount to a 1.25 percentage point cut, far exceeding earlier expectations.
Such a rate cut would lower borrowing costs for U.S. households and companies, potentially boosting the economy. However, it could take months to a year for the full effects to materialize. The labor market’s poor performance in July, with only 114,000 jobs added compared to an estimated 185,000, underscores the urgent need for monetary easing.
Despite the Fed’s decision to keep benchmark borrowing costs unchanged at a 23-year high during its latest meeting, many investors believe the central bank should have acted sooner. Quincy Krosby, chief global strategist at LPL Financial, remarked to CNBC, “The market is now wondering if the Fed is too late in transitioning monetary policy.”
Bret Kenwell, a U.S. investment analyst at eToro, noted that the weak jobs report shifts the focus from “if” the Fed will cut rates to “by how much.” He emphasized the importance of maintaining a strong labor market, stating, “The labor market is the lifeblood of the U.S. economy, and the Fed needs to ensure they don’t risk weakening it too much solely in an effort to bring down inflation.”
Overnight, Japan’s benchmark Nikkei 225 experienced its second-largest points drop in history, falling a staggering 5.8%. European markets also took a hit, with the pan-European Stoxx 600 index dropping 1.7% to a three-month low. Germany’s DAX shed 1.5%, France’s CAC 40 slipped 1%, and London’s FTSE 100 fell 0.6%.
The declines followed Thursday’s retreat on Wall Street, prompted by weak manufacturing data that raised concerns the Federal Reserve may have waited too long to cut interest rates, increasing the risk of a recession. Kiyoshi Ishigane, chief fund manager at Mitsubishi UFJ Asset Management, expressed surprise at the extent of the stock market decline, attributing it to fears of a significant collapse in the U.S. economy.
José Torres, a senior economist at Interactive Brokers, commented on the situation, saying, “The short-lived satisfaction of Fed Chief Powell communicating decent odds of a September rate cut has turned sour as investors are now panicking that the central bank isn’t trimming soon enough.”
Adding to the gloom, Intel announced a nearly 19% decline in its shares during aftermarket trading and plans to cut 15% of its workforce, about 15,000 jobs, to better compete with rivals like Nvidia and AMD. Japan’s market, which had surged to an all-time high last month, has lost 6.2% over the past three months, retreating to its January trading levels. The Bank of Japan’s recent interest rate hike has further exacerbated the market turmoil, pushing the yen higher against the dollar and hurting the earnings of major manufacturers while deflating a tourism boom.
Elsewhere in Asia, markets continued to struggle. Hong Kong’s Hang Seng dropped 2.1%, the Shanghai Composite Index lost 0.9%, and the Kospi in Seoul sank 3.7%. Taiwan’s Taiex fell 4.4%, and Australia’s S&P/ASX 200 gave up 2.1%. India’s Sensex dropped 1.1%, and Bangkok’s SET fell 0.7%.
This week has been nerve-wracking for markets, despite central banks in Japan, the United States, and England acting largely as expected. The Federal Reserve’s decision to maintain high-interest rates has sparked concerns about the potential for prolonged economic stagnation. Thursday’s S&P 500 drop of 1.4%, coupled with a report from the Institute for Supply Management indicating shrinking U.S. manufacturing activity, underscores the precarious state of the economy.
With employment growth slowing more than anticipated, the Fed’s strategy to balance labor demand and supply through restrictive interest rates appears to be working. However, as Philip Marey, senior U.S. strategist for Rabobank, cautioned, the risk remains that this approach could halt employment growth entirely, potentially sliding the economy into a recession.
