Financial markets experienced a fresh wave of volatility as concerns over a potential US recession dampened enthusiasm for the year’s robust stock rally. From New York to Tokyo, equities took a significant hit, highlighting fears that the recent bullish momentum might have been overextended.
Major global indices plummeted, with the S&P 500 poised for its steepest decline in nearly two years. Trading volume surged to 65% above the monthly average, underscoring the market’s anxiety. The Nasdaq 100, heavily weighted with tech stocks, headed for its worst start to a month since 2008. Wall Street’s VIX index, a measure of market volatility often referred to as the “fear gauge,” saw its largest spike since 1990.
The bond market also saw significant activity. The yield on two-year Treasuries, which are sensitive to Federal Reserve policy changes, briefly fell below that of the ten-year bond for the first time in two years. This inversion often signals expectations of an economic downturn. The sharp market correction led to speculation about an emergency rate cut by the Fed, with the probability peaking at 60% before receding.
“The economy isn’t in a crisis yet, but we are entering a danger zone,” said Callie Cox from Ritholtz Wealth Management. “The Fed risks falling behind if it doesn’t address emerging cracks in the job market.”
The ten-year Treasury yield stabilized at 3.78%, while the dollar weakened on the likelihood of Fed easing. Corporate credit markets mirrored the volatility seen in equities, with a key risk gauge posting its most significant one-day spike since the collapse of Silicon Valley Bank in March 2023. This turmoil effectively halted US corporate bond sales on a day expected to be one of the busiest of the year. Cryptocurrencies were not immune, with Bitcoin plunging about 10%.
In Japan, traders unwound carry trades, boosting the yen by 2% and causing the Topix index to drop 12%, its most significant three-day decline since 1959. This rout wiped out $15 billion of SoftBank Group Corp.’s value on Monday. “We are seeing the return of recession fears derailing the previously optimistic market sentiment,” said Maxwell Grinacoff of UBS Investment Bank.
The current market upheaval is validating warnings from prominent Wall Street bears. JPMorgan Chase & Co.’s Mislav Matejka and Morgan Stanley’s Michael Wilson have both highlighted the risks from weakening business activity and deteriorating earnings outlooks.
“This doesn’t look like the recovery that was hoped for,” Matejka noted. “We remain cautious on equities, anticipating a phase where ‘bad news is bad news.'”
Long-time market observer Ed Yardeni suggested that the selloff bears resemblance to the 1987 crash, where fears of a recession proved unfounded despite a significant market drop. “This situation feels reminiscent of 1987. The market crash was severe, but it didn’t lead to an economic recession,” Yardeni said on Bloomberg Television.
Seema Shah from Principal Asset Management argued that recession fears might be exaggerated but noted that an immediate market recovery would need catalysts such as stable yen, strong earnings, and solid economic data. “Despite the recent rout, the AI-fueled rally in global equities is not necessarily over,” said John Higgins at Capital Economics. “This situation feels more like a temporary pullback rather than the bursting of a bubble.”
Goldman Sachs Group Inc.’s Tony Pasquariello advised investors to hedge their risks. “There are times to accelerate and times to brake. Currently, I’m inclined to reduce exposure,” he said.
As the selloff intensified, JPMorgan’s trading desk noted that the rotation out of the technology sector might be nearing its end, suggesting a potential buying opportunity. “We think we’re approaching a tactical opportunity to buy the dip,” said John Schlegel, JPMorgan’s head of positioning intelligence.