Share market turmoil explained: what causes a stock market crash and will there be a recession?

Fears of a U.S. recession gripped global markets, sparking equity market volatility that prompted investors across Asia, Europe and North America to downgrade their positions – at the same time.

The Great Recession has raised questions about whether investors are facing a major stock market crash – similar to the global financial crisis or Black Monday of 1987 – or it’s just a long-term pullback after a strong period of strong gains.

What caused the market crash?

Uncertainty erupted after the US Federal Reserve hinted after its July 31 meeting that interest rates would soon be cut,​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​ considered as the influence of the elements.

But the gains quickly evaporated as investors reinterpreted the rate cut as a sign that the world’s largest economy was slowing down.

Several categories of economic data, including manufacturing, durable goods and – especially – employment and income data, have raised questions about the health of the US economy, with the “Sahm ​​Rule” being considered well it indicates recession. This indicator, produced when there was a rapid increase in the unemployment rate, has accurately reflected every economic downturn since the second world war.

AMP chief economist Shane Oliver said “fears of recession are now back with a vengeance, particularly in the US”.

Nick Healy, Sydney portfolio manager at Wilson Asset Management, said the US data had proved softer than expected, prompting a strong market reaction.

“It’s fair to describe it as an uncertain situation, but my view is that it’s difficult to make strong predictions about the future from one month of economic data,” Healy said.

After a weekly news break, Asian markets rallied on Monday and swept European and American markets later in the day.

Wall Street’s fear gauge, the CBOE Volatility Index, shot above 65; situations not reported since the epidemic, and reminiscent of the GFC, before resolving.

The S&P 500 lost 3% on Monday, while the tech-focused Nasdaq fell 3.43%. While both figures were impressive, they were softer than what the futures market had initially indicated, providing relief to traders and raising hopes that the sell-off would not turn into a bearish sell-off. complete.

Even after the losses, the benchmark S&P 500 index is still up more than 9% since January, as is the Nasdaq.

What was hit the hardest?

Stocks, markets and indices that were at their highest highs tended to fall the most.

Chip maker Nvidia, which has had a period of strong performance for the technology sector, was down 15% at one point on Monday, before cutting the loss in half, while bitcoin also fell sharply.

Australia’s share market had its worst day since the outbreak, wiping more than $100bn of value from local stocks in a single trading session.

But it was Japan’s Nikkei that came under the most pressure, falling 12% on Monday before rebounding strongly on Tuesday.

Investors have been concerned about the state of the Japanese economy and the recent effects of the strengthening yen, which has given rise to the so-called “car trade”, where investors borrow cheaply in yen. and they buy high-yielding assets including the US dollar.

Analysts had warned that yen trading was volatile, causing net calls and forced selling.

Internet trading firm IG said it suspected the surprise market action in Japan was “the final act of clearing long positions in the Japanese economy”, citing investors who had been caught off guard. it’s a yen business.

Other safe-haven assets, such as bonds, have proved to be among the few safe havens for the turmoil, with strong moves challenging all bets in recent months.

That strong sentiment was underpinned by optimism about AI and the broader tech sector, as well as expectations that inflation will recover, the labor market will remain strong and the economy will emerge on time. of inflation.

What happens next?

Although it is too early to say whether the selling pressure will decrease, at least the strong fall is a warning sign.

Fears of a global recession in recent years have been linked to fears that cost-of-living pressures will eventually dampen spending enough that the economy will reverse.

The “canary in the coalmine” investors are looking at is the American online company Wayfair, which warned on Thursday that consumers were too cautious after recording a drop of close to 25% from the levels the highest spending recorded in the last three years.

“This reflects the magnitude of the peak correction in housing stock that occurred during the Great Financial Crisis,” Wayfair CEO Niraj Shah said in an earnings call.

While those discretionary spending figures support the case for the next bear market, investors are also looking at the upcoming US election and related spending policies, which could act as another impetus for shares. .

“There’s a situation where both candidates and parties are more than happy to spend money that should keep investment dollars flowing into the economy,” Healy said.