On Monday, August 5, global markets experienced a significant downturn. However, signs of recovery appeared on Tuesday, August 6, amid hopes that central banks would quickly cut rates to support the economy and improve market sentiment.
Major US indices—the Nasdaq, the S&P 500, and the Dow Jones—as well as key European markets like the UK’s FTSE, France’s CAC 40, and Germany’s DAX, faced substantial losses on August 5 due to mounting fears of a US recession and the necessity for the Federal Reserve to cut rates swiftly to support growth. The Nasdaq, S&P 500, and Dow Jones each fell by 3%, while the FTSE, DAX, and CAC 40 dropped by up to 2%.
In contrast, Asian markets showed recovery on Tuesday, August 6. Japan’s Nikkei, which had suffered a massive loss of 14%—its worst one-day loss since “Black Monday” of 1987—bounced back with a 9% increase.
Indian stock market benchmarks, the Sensex and the Nifty 50, closed 3% lower on Monday, with mid- and small-cap indices falling by up to 4%. The sharp losses in the Indian stock market resulted in investors losing nearly ₹15 lakh crore in a single session.
The recent sharp market declines in the US and other major markets globally followed a weak July payroll report released on Friday. The report revealed an increase in the US unemployment rate to 4.3% last month, marking the fourth consecutive monthly rise, which spooked investors and fueled fears of a US recession. Additional factors contributing to the market rout included rising tensions in the Middle East, fears of a reverse yen carry trade after the Bank of Japan’s rate hike, unimpressive quarterly earnings, and inflated valuations.
Global markets have corrected sharply over the last two days due to disappointing job scenarios in the US, leading to fears of recession and concerns about a reverse yen carry trade following Japan’s interest rate hike.
Is the Fear of a US Recession Real?
According to a Bloomberg report, economists from the Goldman Sachs Group have increased the probability of a US recession in the next year from 15% to 25%. While there are some signs of a slowdown in the US economy, it is too early to conclude that a recession is imminent. Traditionally, an economy is considered to be in recession if its GDP goes negative for two consecutive quarters.
Data from the US Bureau of Economic Analysis shows that the US GDP grew at a rate of 2.8% for the April to June quarter this year, making it unlikely that the US growth rate will turn negative soon. Experts suggest that the increase in the unemployment rate in July may be attributed to a growing labor force rather than an economic slowdown.
Another Bloomberg report on August 5 indicated that the US services sector rose in July after contracting the previous month by the most in four years. The Institute for Supply Management’s (ISM) index of services rose 2.6 points to 51.4. Readings above 50 indicate expansion, and the July figure was slightly firmer than the median projection in a Bloomberg survey of economists. Last week, ISM data showed the biggest contraction in manufacturing in eight months.
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What Should Indian Stock Market Investors Do?
Experts expect global markets to stabilize in the coming sessions. Many view this correction as healthy for the Indian market, which had reached unreasonably high valuations.
A global economic slowdown could actually benefit India. An economic slowdown in the West often leads to a drop in oil prices. As India is the third largest importer of crude oil globally, a fall in crude oil prices is positive for its economy, improving the exchange rate and forex reserves and trimming the fiscal deficit.
Indian investors should not worry too much about a US recession. Historically, the economic pain of the West has been a gain for India. This was proven in 2008-09 and 2016. Whenever there are recession fears in the US or signs of deflation, oil prices drop significantly. This is a major positive for the Indian economy and market.
Economic indicators are crucial, but the role of liquidity and valuations often gets overlooked in the market. Experts believe the US market will stabilize in the next few days, attributing the recent global market downturn to high valuations and a mismatch between liquidity and market capitalization. Except for the Chinese markets, most major markets worldwide are at high valuations.
Negative global sentiment can impact foreign capital inflows into India, causing some volatility in the Indian market.