New Black Monday shakes global stock markets’ crowning moment

Stock markets across the globe suffered $6.4 trillion in losses during trading on Aug. 5, equivalent to twice the size of the French economy.

The Dow Jones Industrial Average lost 1,101 points or 2.77 percent, while the Nasdaq Composite plunged by more than 6 percent at one point, and the S&P 500 by more than 3 percent.

Similarly, the Japanese Nikkei 225 index plunged by more than 12 percent, marking its worst performance since 1987.

CNN Business described what happened in the financial markets as a tailspin after a prolonged period of calm.

Financial analysts indicated that the events are reminiscent of Black Monday, which occurred on Oct. 19, 1987.

The historic Black Monday wiped out $500 billion, with the Dow declining by 22.6 percent in a single day, while the S&P 500 lost 30 percent. Such a decline in the two most important indexes alerted the world’s attention to a global stock market shock, similar to the Wall Street crash that occurred in October 1929, also known as the Great Crash or Black Tuesday.

It is believed that the recent collapse in the US stock markets is due to the gloomy July employment report released by the US Bureau of Labor Statistics on Aug. 2, and concerns about a potential economic recession in the US.

The US Bureau of Labor Statistics reported on Aug. 2 that the unemployment rate rose to 4.3 percent in July, and nonfarm payroll employment increased by 114,000. Employment continued to trend upward in healthcare, construction, and transportation and warehousing, while the information sector lost jobs.

Market experts have blamed the Federal Reserve for the recent plunge in the American stock market, as the Fed has left rates unchanged at the current range of 5.25-5.50 percent to combat high inflation in the US.

Claudia R. Sahm, a prominent American economist, defined the starting signals of recession indicators as when the three-month moving average of the national unemployment rate rises by 0.50 percentage points, equivalent to 50 basis points or more, relative to the minimum of the three-month averages from the previous 12 months.

According to Reuters, the US unemployment rate jumped to a near three-year high of 4.3 percent in July amid a significant slowdown in hiring, heightening fears that the labor market was deteriorating and potentially making the economy vulnerable to a recession.

Market experts have blamed the Federal Reserve for the recent plunge in the American stock market, as the Fed has left rates unchanged at the current range of 5.25-5.50 percent to combat high inflation in the US.

Inflation in the US reached its highest levels since 1981, hitting 9.1 percent mid-year in 2022.

Finally, financial experts have attributed the stock market crash to geopolitical uncertainty and a surging Japanese yen.

I believe one of the reasons behind the collapse is the excessive use of quantitative easing policies during the COVID-19 pandemic and the reduction of interest rates to zero.

This encouraged companies and individuals to borrow cheaply and use the funds to invest and speculate heavily in the stock markets, ultimately leading to an exaggerated rise in global stock market indices and the formation of a market bubble, particularly in technology companies.

Therefore, it was necessary and inevitable for the stock markets to undergo a correction to neutralize the burst bubble.

• Talat Zaki Hafiz is an economist and financial analyst. X: @TalatHafiz