In a significant market shift observed on Monday, US equity indexes faced a sharp decline, primarily driven by growing concerns surrounding a potential recession. As expectations for interest-rate cuts in September and beyond became prevalent, market sentiment turned bearish, resulting in stark losses across major indices.
The Nasdaq Composite, heavily weighted with technology stocks, plummeted by 2.8%, notably recovering from session lows where it had previously dropped over 1,000 points. This alarming downturn prompted reports highlighting the 'Magnificent Seven' stocks, which stand to lose an estimated $1 trillion in market capitalization.
Key players in this market sell-off included giants like Nvidia and Apple, which were instrumental in dragging the tech sector down by 3.2%, the highest decline among various industry groups. The S&P 500 also experienced a substantial drop, sinking 2.5% to settle at 5,215.1, while the Dow Jones Industrial Average fell 2.3% to 38,832.9.
Both indices showed signs of partial recovery after earlier sharper declines, echoing the turmoil that characterized the trading session. All market sectors encountered intraday declines, with consumer discretionary and financial sectors posting the second and third largest drops, respectively, contributing to the overall bearish sentiment. Heightening fears in the market, the CBOE's Volatility Index (VIX)—often referred to as the 'fear gauge'—surged dramatically, rising 45.5% to 34.21 after posting an impressive 80% increase earlier during the trading day. In the realm of cryptocurrencies, Bitcoin saw a notable plunge, falling 6% to $54,637.04 amidst a prevailing global risk-off sentiment.
Japanese equity markets were particularly hard-hit, with the Nikkei index cratering by over 12%. European markets did not fare any better, with key indexes such as the FTSE 100 in the UK, Germany's DAX, and France's CAC closing at least 1.3% lower. A research note from D.A. Davidson articulated the situation succinctly, stating, "Global stock markets plummeted, with Japanese shares at one point surpassing their 1987 Black Monday decline, as concerns about a US recession drove investors away from risk." As investors scrutinized the likelihood of fiscal policy adjustments, the FedWatch Tool indicated an 86% probability of a 50 basis-point rate cut by Monday afternoon, a notable increase from 74% the previous day and a mere 11% at the start of the prior week. Furthermore, investment bank Goldman Sachs revised its projections, indicating that the Federal Reserve might implement three consecutive 25 basis-point cuts in September, November, and December, adjusting their prior forecasts which had suggested more gradual quarterly reductions.
Goldman Sachs elevated its annual recession probability forecast by 10 percentage points to 25%, reflecting deepening economic uncertainty. Adding to the economic narrative, last week's employment report for July presented weaker-than-anticipated figures, reinforcing worries about a decelerating labor market according to a note from Stifel.
The analysis stated, "While this is certainly a feather in the cap of the doves anxious to cut in September, there remains another round of employment data and five critical inflation reports between now and September 18th." Despite earlier drops, Treasury yields exhibited a slight uptick, with the 10-year yield climbing less than one basis point to 3.80% and the two-year rate increasing by 5.6 basis points, reaching 3.93%. On the economic front, the Institute for Supply Management's US services index showed a rise to 51.4 in July from a previous 48.8 in June, surpassing Bloomberg's expectations of a flat 51.
However, the S&P Global US services purchasing managers' index was downgraded to 55 in July from its prior flash reading of 56, indicating a shift in expectations, especially as it stands below the 55.3 recorded in June. A reading above 50 suggests expansion in economic activity, while below 50 signals contraction. In commodity markets, West Texas Intermediate crude oil prices declined by 0.7% to $73.02 per barrel, struggling to recover losses of up to 0.8% from earlier in the session.
Additionally, gold prices fell by 0.9% to $2,446.30 per ounce, while silver took a more pronounced hit, slumping by 4% to $27.26. Overall, the market's trajectory underscores a compelling narrative of investor anxiety amid prevalent economic uncertainties, reflected in the movements of key stocks and economic indicators..