Global stock markets end the day sharply lower

 What we covered here

Wall Street took a beating Monday as all three major indexes plunged on fears the US economy is slowing faster than expected.

Traders upped their bets for a September rate cut from the Federal Reserve, with some demanding an emergency cut outside of the Fed’s regular eight-week meeting cycle.

Concern mounted that last week’s dismal jobs report was another sign that the central bank has failed to manage the US economy, and that a significant slowdown is ahead.

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Tech stocks led the selloff, crypto dropped, oil fell and Treasury yields plunged to some of their lowest levels this year.

The global gutpunch for markets began when Japanese stocks suffered their biggest loss in 37 years, with the Nikkei 225 index plunging by more than 12%.

Losses continued on US exchanges, with the Nasdaq Composite falling more than 6% at one point. The S&P plunged by 4.25%. The Dow also stumbled, dropping by more than 1,000 points on several occasions during the day’s trading.

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Analysis: Why the economy is set – for now

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From CNN's Richard Quest

There is always a lag between when rates go up and when the economy sees the full effects. That gap is generally between 9-15 months and is called the monetary lag. 

By now, the Federal Reserve’s cumulative rate hikes are weighing down employment, which is always among the last bits of the economy to feel the effect. Why? Because companies are reluctant to lay off staff and take on new employees.

This is what we are seeing now. The Fed’s medicine has crushed inflation, but it’s also causing companies to lay off or not hire more staff.

So does the Fed need to start paring back its rate hike medicine before there’s any real damage to the economy? We don’t know and won’t know for many months ahead because the US economy is set for the time being.

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Even if the Fed starts cutting rates next month, remember the monetary lag? One cut won’t make any difference. Two or three before the end of the year will have an effect ….by the spring of next year.

The biggest danger here is that everyone sees the market falling and gets panicked. Spending stops; worries grow; more jobs are lost; more spending stops; and a self-fulfilling downward spiral feeds on itself, making a bad situation worse. If the market continues to drop, the falling “wealth effect” we all feel will take its toll.

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But there is one positive side: Back in 2022, when rates were at zero, the worry was the Fed had little room to maneuver to boost the economy. Today there are 500 basis points of interest rates that can be cut, cut and cut again. The Fed can certainly get the economy into a better place …but probably not before we’ve all suffered a bit more pain.

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