Global Stock Markets Suffer Sharp Decline

Early in August 2024, a sharp and alarming selloff seized the world's stock markets, striking even experienced investors with its suddenness and intensity. Several economic variables, such as worries about a possible downturn in the US economy and changes in Japan's monetary policies, combined to cause the selloff that destroyed billions of dollars worth of value from stock markets around the globe. The quick rebound of some markets and the durability of some sectors point to the possibility that the collapse may have been exaggerated, even though it was motivated by valid worries, notwithstanding the ensuing fear.

Causes of sell-off

Two primary factors are responsible for the market turmoil. First, July's job growth was only 114,000, significantly less than the average monthly rise of 215,000 for the preceding year, according to the U.S. Bureau of Labor Statistics' disappointing economic data. A recession was also feared because the jobless rate in the United States increased by 0.2 percentage points to 4.3%. Due to investors' interpretation of the data as evidence of a slowing U.S. economy, they had been anticipating higher job growth, and stock markets saw broad sell-offs.

The Bank of Japan's unexpected decision to stop its purchases of Japanese government bonds and increase its benchmark interest rate from nearly zero to 0.25% was the second significant cause. This resulted in a sharp change in Japan's long-standing stimulus monetary policy and a spike in the yen's value relative to the US dollar. As the gap between US and Japanese interest rates narrowed, investors sold off US bonds, which in turn caused stock prices to fall as they reorganized their portfolios.

These events, compounded by negative economic indicators such as high unemployment rates and sluggish GDP growth, triggered a global market collapse. The Dow Jones Industrial Average suffered its worst day in nearly two years, plunging 1,033.99 points, or 2.6%, to close at 38,703.27. The Nasdaq Composite and the S&P 500 also experienced significant declines, with losses of 3.43% and 3%, respectively.

Impact on Global Stock Exchanges

The selloff extended outside of the US market. Fears of global financial instability rose when Japan's stock market saw its biggest one-day decline since the infamous Black Monday of 1987. The New York Stock Exchange (NYSE), Nasdaq, and Euronext, three of the world's top 10 stock exchanges by market capitalization, were among the other significant international stock exchanges affected. These exchanges collectively represent trillions of dollars in domestic market capitalization, with the NYSE leading at $27.88 trillion, followed closely by the Nasdaq at $25.91 trillion, which saw billions of dollars in value wiped out in a matter of hours.

Sector-specific performance varied greatly despite a sharp fall in the market as a whole. The technology and healthcare industries showed resiliency despite notable vulnerabilities in consumer discretionary, materials, and energy. The sharp decline in the value of technology equities during the first half of 2024 was caused by their sudden revaluation, exacerbated by digital transformation and artificial intelligence developments.

The S&P 500 gained 28.24% from January to June 2024, indicating a great performance in the information technology sector. However, this sector fell 13.81% during the early August selloff as investors adjusted their expectations due to rising interest rates and uncertain economic conditions. Similarly, Communication Services saw a 10.38% decline during the selloff after rising 26.68% over the year's first half.

In contrast, sectors like utilities and real estate showed resilience, with utilities surging by 6.60% and real estate rebounding by 5.69% between June 30 and August 5, 2024. When the economy was weak, and investors wanted to escape the volatility of other parts of the market, these industries gained from their perceived steadiness.

After the markets digested the economic data and adapted to the new monetary policies, there were indications of recovery despite the initial panic. U.S. stock futures increased on August 6, and Japanese markets recovered much of their 12% decline in short order. Strong corporate profitability and a renewed emphasis on industries with potential for long-term growth, such as technology and healthcare, supported the recovery.

Fears of a downturn in the economy can swiftly lead to significant drops, as shown by the selloff in global markets. Though worries about shifting policies and a U.S. recession continue, several sectors have recovered quickly, suggesting that the panic may have been exaggerated. Investors should remain cautious but look for opportunities in this uncertain market.