Markets tremble as risks weigh on the US economy

NEW YORK (AP) — Almost everything on Wall Street is collapsing Monday as fears of a slowing U.S. economy deepen and trigger a new wave of selling in financial markets around the world.

The S&P 500 was down 2.4% in afternoon trading. The Dow Jones Industrial Average was down 864 points, or 2.2%, as of 1:25 p.m. ET, and the Nasdaq Composite was down 2.8%.

The declines are just the latest in a series of global selloffs that began last week. Japan's Nikkei 225 opened Monday by plunging 12.4%, its worst day since the Black Monday crash of 1987.

It was the first time Tokyo traders reacted to a report Friday showing that U.S. employers slowed hiring last month by more than expected. It was the latest weaker-than-expected data on the U.S. economy, raising concerns that the Federal Reserve has been holding back the U.S. economy too hard and for too long by raising interest rates in hopes of stifling inflation.

Professional investors warned that some technical factors could amplify the action in the markets, but the losses were still staggering. South Korea’s Kospi index fell 8.8%, European stock markets fell more than 1% and bitcoin fell from more than $61,000 on Friday to less than $55,000.

Even gold, which has a reputation for offering safety in turbulent times, fell 1%.

That’s partly because traders have begun to wonder whether the damage has been so severe that the Federal Reserve will have to cut interest rates at an emergency meeting before its next scheduled decision on Sept. 18. The yield on the two-year Treasury note, which closely tracks the Fed’s expectations, briefly fell below 3.70% in the morning, down from 3.88% late Friday and 5% in April. It then recovered to 3.93%.

The Fed could swoop in to save the day with a big rate cut, but the case for cutting between meetings seems unconvincing, said Brian Jacobsen, chief economist at Annex Wealth Management. Such measures are typically reserved for emergencies, like COVID, and a 4.3% unemployment rate doesn’t seem like much of an emergency.

The U.S. economy is still growing, and a recession is far from certain. The Fed made clear the tightrope it was walking when it began raising rates sharply in March 2022: too aggressive a policy would stifle the economy, but too loose a policy would give inflation more oxygen and hurt everyone.

Goldman Sachs economist David Mericle said the odds of a recession in the next 12 months were higher after Friday’s jobs report. But he still puts the odds down to just 25%, down from 15%, partly because the data looks generally good and he doesn’t see any major financial imbalances.

Some of Wall Street’s recent declines may also simply be the result of a stock market that has hit dozens of all-time highs this year, thanks in part to excitement about artificial intelligence technology and hopes of interest rate cuts ahead. Critics have been saying for some time that the stock market looks expensive after prices have risen faster than corporate profits.

Markets tend to go up like they’re going up stairs and down like they’re falling out of a window, according to JJ Kinahan, CEO of IG North America. He attributes much of the recent concern to euphoria over the decline of AI and a market that has rushed.

Professional investors also pointed to the Bank of Japan’s decision last week to raise its main interest rate from near zero. Such a move helps bolster the yen’s value, but it could also force traders to hastily exit trades in which they borrowed money at near zero cost in Japan and invested it elsewhere in the world.

U.S. stocks pared losses Monday after a report showed growth in U.S. services businesses was slightly stronger than expected. Growth was led by companies in the arts, entertainment and recreation sector, as well as accommodation and food services, according to the Institute for Supply Management. Treasury yields also pared losses after better-than-expected data.

Shares of companies whose profits are closely tied to the strength of the economy, however, suffered heavy losses on fears of a slowdown. Smaller companies in the Russell 2000 index fell 2.8%, further weakening what had been a rally for them and other struggling sectors of the market.

To top it all off, stocks of big tech companies have also fallen, as the most popular markets for much of this year have continued to slump. Apple, Nvidia and a handful of other big tech stocks, known as the “Magnificent Seven,” have propelled the S&P 500 to record highs this year, even as high interest rates have weighed on much of the rest of the stock market.

But in the past month, big tech companies have seen their momentum accelerate as they worry that investors have bid up their prices too much and that expectations for future growth are becoming too difficult to meet. A string of disappointing earnings reports, starting with updates from Tesla and Alphabet, added to the pessimism and accelerated the declines.

Apple fell 3.9% on Monday after Warren Buffett's Berkshire Hathaway revealed it had reduced its stake in the iPhone maker.

Nvidia, the chip company that has become Wall Street’s poster child for artificial intelligence, fell even more, down 5.5%. Analysts cut their profit forecasts for the company over the weekend after a report from The Information said Nvidia’s new AI chip was delayed. The recent selloff cut Nvidia’s gain for the year to 104%, down from 170% in mid-June.

Since they are the seven largest companies in the market by market value, their stock movements carry much more weight on the S&P 500 and other indexes.

Concerns about corporate profits, interest rates and the economy are also weighing on the market. The war between Israel and Hamas could escalate, which, beyond its human toll, could also cause sharp swings in the price of oil. This is in addition to broader concerns about potential flashpoints around the world, while the upcoming US elections could further muddy the waters.

Wall Street is worried about the impact that policies implemented in November could have on markets, but the wild swings in stock prices could affect the election itself.

The threat of a recession could put Vice President Kamala Harris on the defensive. But slower growth could also further reduce inflation and force former President Donald Trump to shift his current focus from fighting rising prices to setting policies to revive the economy.

A strong jobs market supports consumer spending, which drives economic growth. The link between jobs and spending will remain a focal point as the U.S. presidential election approaches, said Quincy Krosby, chief global strategist at LPL Financial.

“It all comes down to jobs,” she said. “When we get to election day, the unemployment rate is going to be extremely high.”

___

AP Business reporters Elaine Kurtenbach, Matt Ott, Christopher Rugaber and Damian J. Troise contributed to this report.

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