Major U.S. stock indexes ended sharply lower on Monday as U.S. recession worries shook global markets and drove investors out of risky assets.
The recession concerns followed weak economic data last week, including Friday’s soft U.S. payrolls report.
Indexes pared losses in the late morning after data showed U.S. services sector activity in July rebounded from a four-year low amid a rise in orders and employment.
The S&P 500 lost 160.23 points, or 3.00 percent, to end at 5,186.33 points, while the Nasdaq Composite lost 576.08 points, or 3.43 percent, to 16,200.08. The Dow Jones Industrial Average fell 1,033.99 points, or 2.60 percent, to 38,703.27.
The weak jobs report and shrinking manufacturing activity in the world’s largest economy added to worries following recent disappointing forecasts from the big U.S. technology companies. The Nasdaq Composite on Friday confirmed it was in correction territory.
On Aug. 2, the Labor Department said that nonfarm payrolls increased by 114,000 and the unemployment rate increased to 4.3, worse than expected.
The so-called Magnificent Seven group of stocks has been the main driver for the indexes hitting record highs this year.
Also on Monday, Japan’s Nikkei 225 index nosedived about 12 percent, the worst rout in its history, and Japan’s Topix index fell 12.2 percent. Yields on U.S. government bonds hit multi-month lows, with the 10-year note last at 3.68 percent, while the two-year slipped to 3.69 percent.
Analysts at Goldman Sachs noted the Fed’s ability to boost market optimism, estimating a 25 percent likelihood of a U.S. recession, whereas JPMorgan analysts were more bearish, assigning a 50 percent probability to a recession. “Now that the Fed looks to be materially behind the curve, we expect a [basis points] cut at the September meeting, followed by another 50 [basis points] cut in November,” said economist Michael Feroli.
Major Wall Street brokerages also revised their Federal Reserve rate projections for 2024 to show greater policy easing by the central bank.
“I don’t think the Fed would go 50 basis points because at the same time it would imply that the Fed was wrong, that a recession is right around the corner and it would do more to increase investor tension than it would to calm nerves,” said Sam Stovall, chief investment strategist at CFRA Research. “If anything, I would say that the Fed might engage in an intra meeting, easing of 25 basis points to let the markets know that it is on top of the issue.”
If the United States enters recession territory, it could roil the already tumultuous 2024 presidential election, which has already seen an assassination attempt and the leading Democrat candidate, President Joe Biden, suspend his reelection campaign in favor of Vice President Kamala Harris. Former President Donald Trump has already deployed messaging related to the U.S. economy and will likely do so as the November election nears.
Other than the Great Depression’s start in 1929, the worst U.S. stock market crash came on Oct. 19, 1987, when the Dow Jones plunged 22.6 percent in what is now known as “Black Monday.”
What Should Investors Do?
The prevailing wisdom is: Hold steady.
Experts and analysts encourage taking a long view, especially for investors concerned about retirement savings.
“More often than not, panic selling on a red day is generally a great way to lose more money than you save,” said Jacob Channel, senior economist for LendingTree, who reminds investors that markets have recovered from worse sell-offs than the current one.
Sell-offs Are Normal
Greg McBride, financial analyst for Bankrate, points out that a 10 percent pullback in markets happens on average once every 12 months. The S&P 500 is down about 8.5 percent from its recent high.
Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, says investors should wait to see how the recent turbulence plays out.
“It remains to be seen whether this recent weakness in the labor market is the canary in the coal mine (in which case the selling is justified) or if it is just a temporary cooling of the job market (in which case this will prove to be another buying opportunity),” he wrote in a note to clients Monday.
Jack Phillips, Reuters, and The Associated Press contributed to this report.