The booming US stock market saw a record fall on Monday, dropping 1500 points at its worst and ending 1175 points down on the start of the day's trading.
The drop in share prices across the Dow Jones had worldwide repercussions, resulting in an estimated $4 trillion lost globally. Japan's Nikkei dropped by nearly 5%, the FTSE 100 was down 2.5%, the CAC 40 in France and Germany's DAX both dipped 3%, South Korea's Kospi fell by 1.5%, and Australia's S&P ASX 200 fell 3.2%.
The market reaction came as a result of Friday's jobs report from the US government, which showed a growth in wages. Growth in wages is a good thing, but it brings about inflation, and with inflation comes an increase in interest rates from the Federal Reserve in the US. If these rates rise then economic growth comes into question. The world economy is growing at a rate of 4% at present, with the US economy a little below that. A rise in interest rates makes borrowing costlier, whether that's mortgage payments, car loans, or credit card debts.
Financial experts and journalists have been reporting that they believe the Fed will make three to four interest rate rises this year, but a lot of the market behaviour has been to act now while the going is still so good. The newly released statistics seem to be bringing a close to that window of opportunity.
The US stock market has been consistently growing in value for the last nine years, but more recently conditions reached the point where the markets really began to snowball in share value, with many experts suggesting over-performance. Analysts were forecasting a 'correction' in the financial markets – such as this one – and lo and behold we have one.
US Federal Reserve building in Washington D.C.
According to an article from MarketWatch, the losses to the Dow Jones were large but worked out as a 7.8% dip in value. In comparison, S&P 500 companies have seen on average a climb of 292% in value since March 9th, 2009.
CBS News went further, highlighting the fact that declines of 10% or more are actually commonplace during bull markets and that the Dow Jones, the FTSE, and others hadn't experienced such a drop in the past two years. One day later and the markets started subdued but quickly rose by around 250 points by 10am, with slightly more growth occurring throughout the day.
Not everyone is so confident that this is just a blip on the radar. Speaking to Time magazine, Jeffrey Kleintop - chief global investment strategist for Charles Schwab – said that rate rises are “often a precursor to a recession and a bear market”.
“The catalyst isn’t fear of a growth slowdown; it is fear of too much growth and surging bond yields” said Kleintop.
“An overheating global economy could mean a more rapid shift by central banks to rein in stimulus” — typically by raising interest rates rapidly.”
At present gold prices have remained stable, but the early reaction to the subdued markets saw prices rise by £15 or $22 per ounce of gold.
