BPS Economist Club
Turning people's good intentions into actionable steps
Stock Market Rollercoaster: Crash, Recovery, and Global Impact
Written by Tobi Woessner
The 2024 financial market was marked by a significant crash on August 5th, followed by a rapid and somewhat unexpected recovery. This period of volatility has been a focal point for analysts, investors, and policymakers alike, as it highlighted both the vulnerabilities and the resilience of global financial markets.
Causes of the Stock Market Crash
The crash that began on August 5, 2024, was largely triggered by an unexpected decision by the Bank of Japan to raise its key interest rate by 0.25%. This move caught global investors off guard, as it signaled a shift from the ultra-low interest rate policy that Japan had maintained for years. The rate hike led to a sharp appreciation of the yen, making Japanese exports more expensive and less competitive. As a result, the Nikkei 225 index plummeted by over 12% in a single day, a drop reminiscent of historical market crashes like "Black Monday" in 1987.
In the United States, the crash was compounded by a mix of economic concerns. A disappointing jobs report for July 2024, which showed slower-than-expected employment growth, fueled fears of a potential recession. The report, coupled with ongoing concerns about inflation and interest rates, led to a significant sell-off in U.S. equities. The S&P 500 fell by 3.2%, and the tech-heavy Nasdaq Composite dropped by 4.1% on the day of the crash.
The Yen Carry Trade and its Impact
The yen carry trade has been a cornerstone of global financial markets for years. This strategy involves borrowing yen at Japan’s historically low interest rates and using those funds to invest in higher-yielding assets in other countries. The success of this trade depends on stable or declining yen exchange rates and interest rates remaining low. When Japan raised its key interest rate by 25 basis points to 0.75% this August, it upended the carry trade, leading to a rapid appreciation of the yen.
As the yen strengthened, the cost of repaying yen-denominated loans increased, forcing many investors to unwind their positions. This led to a mass sell-off of global assets, particularly in equities and commodities, as investors scrambled to cover their losses. The unwinding of the yen carry trade also put downward pressure on global markets, as the demand for yen pushed up its value, making Japanese exports less competitive and further dampening investor sentiment.
Volatility and Global Impact
The market's volatility during this period was intense, as reflected by the VIX (Cboe Volatility Index), often referred to as the "fear gauge" of Wall Street. The VIX surged from around 17 points in the days leading up to the crash to over 65 points at its peak on August 5, marking its highest level since the COVID-19 pandemic in 2020.
The effects of the crash were not confined to Japan and the United States; they rippled across global markets. European stocks also saw sharp declines, with the STOXX Europe 600 index falling by nearly 5%. Emerging markets, particularly those in Asia and Latin America, were hit hard as well. The MSCI Emerging Markets Index dropped by 7% in the week following the crash, reflecting the broad-based nature of the sell-off.
Interestingly, China's stock market showed relative stability during this turmoil. The CSI 300 index, which tracks the largest companies listed in Shanghai and Shenzhen, fell by only about 1%. This resilience was largely attributed to China's stricter regulatory environment and its lesser reliance on foreign capital, which insulated it from some of the global financial volatility.
Recovery Rally
Despite the severity of the crash, the markets began to recover rapidly by the next day, with the Nikkei 225 index rebounding 10%. The S&P 500 had regained much of its lost ground, driven by a shift in investor sentiment. One of the key factors behind this rally was growing speculation that the Federal Reserve would adopt a more dovish stance in response to the cooling inflation data. The Consumer Price Index (CPI) report for July 2024 indicated that inflation was moderating, which raised hopes that the Fed might pause or even reverse its interest rate hikes.
Additionally, corporate earnings reports provided a boost to the market. Despite the economic uncertainties, many companies reported better-than-expected results for the second quarter of 2024, particularly in sectors like technology and healthcare. This positive earnings momentum helped restore investor confidence, leading to a rebound in stock prices.
Broader Economic Implications
The 2024 stock market crash and subsequent rally underscore several important economic lessons. Firstly, the crash highlighted the fragility of global financial markets and their sensitivity to policy changes, especially those related to central banks. The unexpected rate hike by the Bank of Japan had a cascading effect across global markets, demonstrating how interconnected the global economy has become.
On the other hand, the recovery illustrated the resilience of markets and their ability to adapt quickly to new information. Investors' swift response to changing economic data and central bank signals played a crucial role in stabilizing the markets and setting the stage for the recovery. This episode also reinforced the importance of investor psychology, as market movements were heavily influenced by expectations about future monetary policy and economic conditions.
In conclusion, the 2024 stock market crash and recovery were driven by a complex interplay of global economic factors, central bank decisions, and investor behavior. This period of volatility serves as a reminder of the delicate balance that exists in global financial markets and the critical role that central banks play in maintaining stability. As markets continue to navigate these challenges, the actions of policymakers and the performance of key economic indicators will remain pivotal in determining the direction of global markets.
Sources:
https://www.vantagemarkets.com/academy/market-crash-august-2024/