The stock markets have been in turmoil – what happens next?

Markets around the world have recovered after dramatic plunges earlier in the week, writes James Moore. But fears about the strength of the US economy remain – and so should expectations of more volatility to come

Traders at work on the floor of New York Stock Exchange (Copyright 2024 The Associated Press. All rights reserved)

Crash? What crash?

Just days away from a bloodbath on the markets and things are looking a whole lot rosier. The final day’s trading was relatively quit, but Thursday saw Wall Street enjoying its best day in nearly two years. The S&P 500, the broad based US index, and the one that we should really focus on when looking across the Atlantic, posted a 2.3 per cent rise. That was its best single day performance since November 2022.

Britain’s FTSE 100 lacks the dyamism of America’s markets, but it nonethless had a spell in the sun Wednesday when it recorded its best session in four months.

So does all this mean that the the steep falls which bookended the previous weekend were just a storm teacup? Move on, nothing to see here, we’re back on track?

Perhaps not. Wall Street’s sneeze, which usually means a runny nose or worse elsewhere, was sparked by fears over the US economy. We’d already seen a tech wobble – which means the S&P as a whole takes a kicking because of how heavily weighted the leading lights of Silicon Valley are on the index – when investors took fright at the scale of the capital outlay on AI among other things.

Tech got crushed again, as did many other stocks, on weak looking data on US jobs. This sparked fears that the world’s biggest economy was hitting the buffers. The dreaded R word - recession - was mentioned in some quarters. That was probably over-egging it but signs of Uncle Sam slowing down were quite enough to spark a sell off.

Just as it was jobs that sparked the rout, it was jobs (or jobs data that sparked the recovery. Thursday saw the release of data showing a seasonally adjusted figure of 233,000 for initial state unemployment claims for the week ending August 3, in what was an otherwise quiet week in terms of US economic numbers. That was down on the previous week’s revised figure of 250,000 and, crucially, below economists’ forecasts (the consensus was 240,000).

This eased the fears caused by the numbers on job creation the previous week and a party started in America’s financial centre. It swiftly spread around the world (Wednesday afternoon in the case of European exchanges). However, a bevy of commentators warned that the volatility may not be over. And with markets in such a febrile mood, it would be wise to listen to them.

For a start, there were troubling signs from Disney’s results to digest for those paying attention. The group-wide numbers got a shot in the arm from the stunning success of Inside Out 2 – with another boost to come from the record breaking (for an R rated movie) Deadpool & Wolverine. The Dinsey Plus streaming service made money too. But there wasn’t much fun to be had at the theme park division. Disney blamed high costs linked to inflation and, crucially, a larger drop in consumer demand than it had expected for a decline in profits at a unit that accounts for more than half of the entertainment giant’s earnings.

People proving reluctant to shell out at Disney’s parks could be another sign that all is not well with the American consumer. But that was not a story Wall Street wanted to hear. And sure, a downbeat quarter (outside of the films) at the House of Mouse might not mean much in the wider scheme of things. On the other hand, it might.

“We’re in a period of heightened uncertainty and the market hates uncertainty,” said Irene Tunkel, chief U.S. equity strategist at BCA Research. That uncertainty can be seen wherever one cares to look: ongoing tension in the Middle East, the forthcoming US elections plus the reaction of the US Federal Reserve to a bevy of forthcoming economic numbers.

The Fed, remember, sat on its hands even as the Bank of England and several other central banks cut their interest rates. America’s inflation number coming in ahead of expectations next week could easily spark another sell off. Wall Street is expecting the Fed to cut rates in September. There will be consequences for a (possibly) slowing US economuy if it doesn’t.

As we’ve seen, the markets have consistently got ahead of themselves in anticipation of multiple rate reductions this year. Trouble is, central bankers are all too well aware that inflation is a devilishly tough nut to crack when it embeds itself. The markets have wobbled once. They could easily wobble again if investors start worrying about what the Fed might or crucially what it might not do in sufficient numbers.

In other words: hang on to your hat. If the markets can shoot up on a moderately optimistic unemployment number for one month – a relatively minor data point as these things go – they could just as easily do the opposite on the back of a bad number. Especially if that bad number is one of the biggies (as inflation is).

So buckle up. The turmoil on the markets likely isn’t over.