The US appears to be on the brink of a recession as economic indicators point to a slowdown in growth and increased financial strain on both consumers and businesses.
Stock markets around the world dropped sharply this morning (5 August) after several key economic indicators suggested the world’s largest economy was heading for a downturn.
In Japan, the Nikkei 225 slumped more than 12% in the worst session since 1987. In the UK, the FTSE 100 was down more than 2% after the markets opened, while the FTSE 250 fell more than 3%.
South Korea’s Kospi index dropped more than 9%, Taiwan’s Taiex exchange by 8.4% and Germany’s Dax by 1%. Markets in Singapore, Indonesia, Thailand and the Philippines also fell. Further falls are expected in the US when markets open.
Analysts attribute the widespread sell-off to a combination of factors, including rising interest rates, geopolitical tensions, and weaker-than-expected corporate earnings reports.
‘Moments of mayhem’
Richard Hunter, head of markets at Interactive Investor, said: “US markets endured another bruising session as a feeble jobs report escalated recessionary fears, resulting in moments of mayhem elsewhere.
“The non-farm payrolls report showed that just 114,000 jobs had been added in July, against estimates of 185,000 and sharply lower than the 179,000 figure for June, which itself was revised down from an initial print of 206,000. At the same time the unemployment rate, which had been expected to remain stable at 4.1%, increased to 4.3%.
“The reading followed weak jobless claims and manufacturing data from the previous day which had taken investors by surprise. The main concern now is whether the Federal Reserve’s reluctance to reduce interest rates thus far is now translating into a policy error which will see the economy glide into recession.”
Hunter added: “The fallout was plain to see, with a flight towards bonds and haven assets and with each of the main indices registering declines. The latest fall of around 2.5% for the Nasdaq puts that market into correction territory, with the index now having fallen by more than 10% from its recent record high. In addition, recessionary fears extended to the banking sector, with the likes of Bank of America and Wells Fargo sliding by 5% and 6.4% respectively.”
The US Federal Reserve held off cutting interest rates last week, in contrast to the Bank of England which reduced the UK base rate to 5%. The jobs report has heightened speculation that the Fed could move by more than 25bps when it meets in September and follow on with further cuts through to year end.
Recent weeks have also seen rumours that the so-called ‘Magnificent Seven’ bubble is about to burst. These tech giants – Apple, Microsoft, Amazon, Google (Alphabet), Facebook (Meta), Tesla, and Nvidia – have driven much of the stock market’s gains over the past decade.
‘Feed excess capital into the market slowly’
Derren Nathan, head of equity research at Hargreaves Lansdown, said: “Trying to catch a falling knife can end in tears, but it’s important not to abandon a long-term lens. Time in the market and diversification have been consistently shown to be the bedrock of successful investing strategies. Current conditions will present opportunities to buy shares in quality companies.
“To mitigate the volatility, it makes sense to feed excess capital into the market slowly, but established companies with dominant market positions have survived and prospered through many cycles. And emerging mega-trends such as artificial intelligence and the potentially enormous healthcare impact of weight-loss drugs haven’t gone away.”
