Why is the Stock Market Falling?

The Indian stock market has taken a big hit over the last two trading days.

In Investors and traders thought the correction on Friday, 2 August, was just a one off, they were in for a shock. Today, i.e. Monday, 5 August, the Nifty index is down over 600 points at the time of writing.

The is a setback for the bulls. From over 25,000 levels, the Nifty dipped below 24,000 in just about seven hours of trade.

Now from the peak, the index is down only about 5% or so and there is always a chance of a pullback.

However, what has spooked the market is the big picture. All stock markets around the world are down.

Why?

Well, the reason is what makes this correction different from previous ones. The last two big declines were due to crises affecting the whole world - the global financial crisis and covid. This time the finger is being pointed to the possibility of a US recession.

But the situation is not so simple. In this editorial, we will examine the reasons behind the latest turmoil in the market.

#1 US Recession

First things first. The US is not in a recession. In the June 2024 quarter, the US economy delivered an annual growth rate of 2.8%. This was much better than the 1.6% growth rate of the previous quarter.

In fact, before the latest GDP numbers were announced, the US economy's growth rate was slowing down over several quarters. The trend was down.

US Growth is Not a Painting a Good Picture

As can be seen in the chart above, before and after a spike in growth in the September 2023 quarter, the trend in growth was down.

But the latest quarter's annual growth of 2.8% had provided some relief from this gloomy picture. The US seems to be back to it's normal trend of growth.

So why is the market worried about a US recession?

Well, financial markets don't care about past data. Traders and investors are only interested in the future. And the future isn't looking good as far as the US economy is concerned.

The US is a consumption based economy. If US consumers reduce their spending by a significant amount, the economy tends to tip over into a recession. The ability to spend is a direct result of higher wages and a rise in employment.

Over the last few months, the unemployment rate in the US has been on a steady rise from all-time low levels. It now stands at 4.3%.

This is not alarmingly high by historical standards but it's the highest since 2021 and there is no doubt that it's going to rise some more.

The layoffs in the US tech sector have made headline news. However, the layoffs in the US manufacturing sector are beginning to have an impact too.

Also, the latest data says that hiring activity in the US fell to a four year low in June 2024.

Higher unemployment has historically been a big reason for the US economy falling into recessions.

#2 US Fed's Interest Rate Policy

When countries opened up after covid lockdowns, there was a huge spike in inflation.

This was due to both the demand (revenge spending) and supply (many companies shutting down).

Central banks around the world hiked interest rates to fight inflation. In India the RBI did so as well.

In the US, the Fed hiked rates at pace that was among the fastest in history. This was bound to impact a debt driven economy like the US eventually.

But the US consumer had a lot of covid related stimulus money in their bank accounts. This had been provided by the US government and to a lesser extent, their respective state governments.

This financial cushion along with the fact that US workers got back to work after the major layoffs due to covid, were the reasons the US has avoided a recession till now.

This is probably one of the main reasons why the Fed was not worried about when exactly it had to cut rates in the face of a recession.

However, the stimulus funds have all been spent and thus, higher interest rates are now beginning to slow down the economy.

The concern in the markets is that the Fed may have hiked interest rates too fast and kept them high for too long, thus making a recession inevitable.

#3 Geopolitics

Concerns of a war in the Middle East have increased over the last week or so with Iran and Israel threatening each other.

The attempts by many countries to find a solution to the war in Gaza have not succeeded. The worry is that of an escalation in tensions in the region which could potentially drag the US into the conflict.

A broader conflict in the region would cause a spike in oil prices which in turn will make inflation worse around the world.

To know more about the possibility of a crash in the Nifty due to a US recession watch the video below.

Happy investing.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...