A swift and sudden downdraft in global stocks is raising concern among ordinary investors about the impact on their portfolios and 401(k) plans.
The S&P 500 slid 171 points, or 3.2%, to 5,187 in early afternoon trading, while the Dow Jones Industrial Average fell more than 1,000 points, or 2.5%. The tech-heavy Nasdaq Composite saw an even steeper decline, sinking 3.8% and pushing its three-day loss to more than 9% following disappointing earnings from industry bellwethers including Amazon and Intel.
Notably, the slump follows what had been a bullish year, with the stock market reaching record highs that bolstered the retirement accounts of millions of U.S. workers. The whiplash may have some 401(k) savers questioning what’s behind the reversal, especially after the U.S. economy had appeared to be on solid footing, with steady growth and cooling inflation, thanks to the Federal Reserve’s flurry of interest rate hikes.
Here are four reasons why experts say the stock market is tumbling, along with their advice on what investors should do.
The Fed might have waited too long to cut interest rates
A range of signals in recent months suggest the economy is losing speed, leading some experts to urge the Federal Reserve to lower its benchmark interest rate for the first time since 2020. For now, however, the central bank has left rates unchanged, including more at its policy meeting last week.
Investors now fret that the Fed may have waited too long to ease borrowing costs for consumers and businesses, raising the risks of a recession.
“The real issue here is investors are worried the Fed is behind the curve in cutting interest rates, and that means there could be a bigger risk of a policy error,” Amanda Agati, chief investment officer of PNC’s asset management group, told CBS MoneyWatch. “The fear is that we might ultimately tip into a recession, versus that prior expectation for a soft landing.”
Economic data points to U.S. slowdown
Stocks has soared into record terrain this year, propelled by expectations the Fed would soon trim interest rates for the first time in for years and the ongoing artificial intelligence boom.
But market sentiment began to shift in mid-July as a growing number of economic signals pointed to a slowdown in growth. Those concerns intensified on August 2 after data showed a dip in manufacturing and construction, while a weaker-than-expected employment report added to Wall Street’s fears about the economy running out of steam.
Potentially more worrisome is that consumer spending — which accounts for roughly two-thirds of economic activity — is showing signs of weakness. Companies such as McDonald’s and Walmart are reporting that their customers are cutting back amid the strain of still-elevated inflation and high borrowing costs.
Still, some experts caution that such data points might turn out to be a blip, rather than a trend.
“Without stating the obvious, one month does not make a trend, so next month’s jobs report will be very important,” said Seema Shah, chief global strategist at Principal Asset Management, in an email. “It’s worth pointing out that the April 2024 payroll number was initially 165,000 and then was revised down to 108,000 before rebounding to 216,000 the following month.”
Tech stocks are a victim of high expectations
Some of the worst-hit stocks during the rout can be found in the tech sector, with the so-called Magnificent Seven, a group of tech stocks including Amazon, Apple and Nvidia, among the market’s worst performers on Monday. Nvidia, the chip company whose technology powers artificial intelligence, has shed 23% of its value since July 31.
Prior to last week, these stocks had been among the year’s best performers, which meant that Wall Street had lofty expectations for their revenue and profit growth. And while their earnings reports have been solid so far this year, they haven’t wowed investors.
“Even if earnings come in as expected, the valuation multiples are so high that it’s hard to sustain” those prices, PNC’s Agati said. “Investors are panicking, and this is a really rapid sentiment shift.”
She added, “We don’t think the underlying fundamentals support this shift. For the most part, the Magnificent Seven have been fine in terms of earnings results.”
Japan’s interest rate hike
Professional investors also pointed to the impact of the Bank of Japan’s move last week to raise its main interest rate from nearly zero.
This boosted the value of the Japanese yen. But it has also forced traders to unwind investments in which they had borrowed money in Japan at near-zero interest rates and then converted the yen into dollars, which they then used to buy U.S. stocks. In other words, traders have had to sell assets to cover their trades, which could be feeding into the stock market declines, experts said.
“This ‘carry trade’ has been unraveling in recent weeks and might have crescendoed on Friday,” according to Yardeni Research.
What should investors do?
First it’s important to understand that stock downturns — even sharp ones — are common. Although the S&P 500 is down roughly 8% from its peak in July, drops in equity prices of 5% or more have occurred at least once a year for the past four decades, according to Oxford Economics. Market corrections, or a drop of at least 10% from their highs, occur an average of every one and half to two years, the firm said in a report.
But even bear markets, or when stocks decline at least 20% from their peak, are normal and aren’t a reason to panic, experts say. While the temptation might be to sell, it’s best to resist that urge, especially for people saving for the long-term such as for retirement. Market timing, or trying to buy and sell stocks to capture gains and avoid losses, is notoriously difficult and can lead to lost opportunities, research from Charles Schwab has found.
If you are a long term investor, take a deep breath — it is very scary, I get it,” Jill Schlesinger, the business analyst for CBS News, told the network. “As long as you are in a long-term portfolio, you shouldn’t worry.”
Moving into cash “is never a good investment,” added PNC’s Agati. That’s especially the case when the Fed is widely expected to cut rates as early as September, which will reduce the returns for savings accounts and money market funds.
“If you are worried about your retirement plan, I wouldn’t be pulling the plug and moving to cash,” Agati added, noting that he would look at investment-grade fixed income investments or U.S. Treasuries because they may provide more attractive yields moving forward.
