Marketplace - “Chaotic,” “volatile,” “tumultuous”

Episode Date: August 5, 2024

These aren’t words you want to hear about the stock market, but here we are. Global markets, including the major U.S. indexes, tanked today. Along with stocks, crude oil prices also took a hit. We’ll look at the causes and what might happen next. Also, the critical role of exporting services in this economy and a status report on a possible TikTok sale.

Okay, okay, let's take a minute or 30 to regroup here. Yeah, markets have fallen, but the last time I checked, the sky's still up there. From American Public Media, this is Marketplace. In New York, I'm Kristin Schwab in for Kyra's Doll. It's Monday, August 5th. Good to have you with us. Let's start with the ugly stuff. The ugly stuff you've already heard about. All three major US indices tumbled today. We'll of course tell you just how much when we do the numbers. Markets in Korea, Taiwan, Australia, and Europe, they all fell too. Japan's Nikkei had its worst day since 1987, wiping out all its gains for the year.

And I'm not trying to dismissively yada yada yada your intrusive thoughts away, but I do think we need to take stock of what's behind all this and separate facts from runaway feelings. Marketplace's Samantha Fields is our voice of reason. Chaotic, volatile, tumultuous? Not exactly words you want to hear when it comes to the stock market, but here we are. Anytime markets are this volatile, it raises difficult questions about where they might go from here and also what the root causes are. Carl Tannenbaum at Northern Trust says there are two root causes of this current instability, one being last week's jobs report.

Which wasn't nearly as good as the ones that we've enjoyed through most of the past couple of years. Though, it wasn't bad either. 4.3% unemployment is still low. The second cause really comes from the Far East. Japan's economy has been one of the better performers during the past 12 months. And as a result, their central bank has seen fit to begin raising interest rates. That has been good for the Japanese yen, but less good for investors around the world.

Who have indulged in what is called a carry trade, simply stated they borrow money at very low interest rates in Japan and they invest elsewhere. But now with higher interest rates and a stronger yen, that isn't looking quite so profitable. So a lot of them are bailing. Thomas Hanig at the Mercatus Center at George Mason University says investors are also worried that the U.S. economy may be faltering. Because they don't know where it's going to end. Will the unemployment rate level off or will it keep rising Because they don't know where it's going to end. Will the unemployment rate level off, or will it keep rising? We don't know.

And so you get timid and you say, I'm going to get out of this now and then wait and see. And that creates uncertainty and fear takes over. The fear being the possibility of a recession. Amy Ariemiankale at DePauw University says if that were to happen... No one wants to be the one left holding the bag. They'd rather sell early to be safe. We've seen this many times before. Small misses in any economic report commonly result in large either upward or downward movements. People do tend to overreact and that's why it's important to go back to fundamentals.

Charles Lieberman at Advisors Capital Management says the fundamentals are still strong. GDP, consumer spending, the job market. The economy is not exactly struggling. It has slowed from a pace that was really unsustainably rapid. So it's growing a little more slowly. But he says it is still growing. I'm Samantha Fields for Marketplace. Wall Street today, well, you already know what music we're gonna play. We'll have the details when we do the numbers. Stocks weren't the only big sell-off happening today.

Commodities also took a hit, particularly crude oil. Futures for West Texas Intermediate dipped below $72 a barrel before regaining some ground this afternoon. And sure, today's market jitters impacted prices, but as Marketplace's Henry Epp reports, there are bigger factors affecting oil. Considering everything that's been going on in the global economy and geopolitics lately, the price of oil has been remarkably stable, says Hugh Daigle at the University of Texas, Austin. Going back maybe 18 months, oil has been bouncing around $80 a barrel. That's due in part to the actions of OPEC Plus, the group of oil producing countries

that make up that cartel, have been voluntarily cutting back production. The idea there is that by constraining supply, it'll drive up the prices and make things slightly more profitable. And that's essentially put a floor on oil prices, keeping them from dropping too far even as the U.S. has pushed more oil into the global market. On the other end, there's China, where an economic slowdown has weakened demand growth for oil, says Matt Smith at the analytics firm Kepler.

That's really putting a ceiling on prices because they're just not pulling in a lot of crude right now because they just don't need to refine as much. And in between that floor and ceiling are all the geopolitical struggles in the world right now. Tensions in the world right now. Tensions in the Middle East, the war in Ukraine, a contested election in Venezuela, which could lead to more sanctions. There's a number of different geopolitical concerns simmering away right now, but ultimately

they're not having an impact on prices. But any one of them could push up prices if oil supplies are impacted. On the flip side, a downturn in the U.S. economy could depress demand and drive prices lower. Ultimately, says Amy Myers Jaffe at New York University, the outlook for oil prices is really uncertain right now. But There is a long-term trend that whenever we have very high oil prices like we've had for the last couple of years, there tends

to be a correction." And we're due for a correction to the downside, she says. One positive of falling oil prices, Jaffee says, falling prices at the pump, which could further ease inflation and make the Fed more likely to cut interest rates soon. I'm Henry Epp for Marketplace. Here's something that may have gotten lost in all the recent markets news. The Justice Department sued social media giant TikTok and its parent company ByteDance on Friday. The DOJ alleges the platform collected personal data from children illegally.

TikTok says it disagrees with the accusations. This is all against the broader backdrop of the beef the US government has with the Chinese-owned app. In April, President Biden signed into law a bipartisan bill that will force ByteDance to sell TikTok to a government-approved buyer or face a ban here in the U.S. That deadline in January of 2025 is now less than six months away. Marketplace's Daniel Ackerman has an update on what kind of sale may or may not be taking shape. Quick reminder, TikTok is big. Like, used by more than a third of Americans big, says

Anupam Chander, a law professor at Georgetown. If you want to promote something, this is the best way to promote it currently in the United States. Chander says that means there are plenty of eager would-be buyers for the platform. But as for the seller, TikTok has said that it is impossible for it to sell for legal and practical reasons. One of those practical reasons, there's not much time, says Florian Ederer

of Boston University's Questrom School of Business. These deals require a lot of negotiation. This isn't a deal where you buy up a small, you know, multi-million dollar company. He says a TikTok sale could run well into the tens of billions of dollars. A deal that complex would be hard to pull off by January. If I had to bet on whether we see a sale that's completely done and dusted, I would probably bet against it. Tiktok did not respond to a request for comment. A group of TikTok creators sued the government, claiming a forced sale violates the First Amendment. Oral arguments are scheduled next month. James Lewis, with the Center for Strategic and International Studies,

says TikTok's owners are expecting a win in court. They are wildly optimistic. To the point, says Lewis, the company isn't even engaging in serious talks for a sale. TikTok's owners are expecting a win in court. They are wildly optimistic. To the point, says Lewis, the company isn't even engaging in serious talks for a sale. Plus? A lot depends, as you know, with everything in Washington, on the outcome of the election. So there's no reason for the company or for the Chinese government to make any concessions now.

Lewis says firms that advertise on TikTok are less sure. He says they're making fallback plans in case of a ban. I'm Daniel Ackerman for Marketplace. Some big Supreme Court decisions came out of the term that ended earlier this year. And the impacts of some of those decisions have yet to ripple through our economy. The landmark ruling Loper-Bright Enterprises v. Raimondo, that's the case that overturned what's known as the Chevron Deference, it shifts power away from federal regulatory agencies and into the hands of the courts and Congress. And as Marketplace's Kimberly Adams reports, it will probably also change the balance of power between the federal government and the states.

Now that the Chevron Deference is gone, there's a general sense that rulemaking by federal agencies in Washington is going to slow down as they make extra sure any new regulations meet the new, stricter legal standard. Congress now needs to potentially take a closer look at the way that they're creating laws and agencies need to take a closer look at whether they have regulatory authority. Leah Dempsey is a partner at the law firm Brownstein. In the meantime, she says, The states will probably try to step in and fill whatever gaps that they think might be there. That's already happening, Dempsey says, with regards to regulating medical debt, for example.

While the Consumer Financial Protection Bureau works through the process of figuring out a nationwide regulation, a number of states have gone ahead and done it themselves. But a state-by-state approach can create its own problems, says Bill Kramer, vice president of policy at the company Multistate, which helps organizations do state and local government advocacy. In the 50 states all decide to go their own way. You have a patchwork of policy making that's very difficult to comply with. He says even one state changing a rule can change the way businesses everywhere else operate. Kramer gave the example of the pork industry.

In 2018, California started requiring pork producers to give sows bigger pens. The industry argued that would force farms outside Cali to change the way they do business. The case went all the way to the Supreme Court last year and the court let California's law stand. Laurie Stevenmer is president of the National Pork Producers Council which brought the case. If the people that we raise pigs for and work with have to make changes for another state, that's going to have additional costs for them and additional regulation. So let's say another four, five, 10, 20 states put in different regulations.

Now all of a sudden, our product has to adhere to those different regulations. California isn't the only state with an economy big enough to trigger national changes. Here's Bill Kramer at Multistate again. I mean, Texas obviously has the size of an economy that would do something like this. I think Florida, New York, Illinois. But even if a small state makes a change, it could potentially influence the rest of the country. So we may end up with groups of states with differing regulatory systems, filling in gaps

when federal regulations are tied up in the courts. And that's just a step in the process of rolling back federal agencies regulatory role, says Ken Nahigian, co-founder of the Balancing Act Project, a group that's been advocating for that rollback. I do think that this is going to put a lot of people on notice that they're going to have to be much more technically proficient. Because advocacy groups and businesses will have to pay close attention to what all of the states are doing and whether regulatory shifts in one place might affect businesses

in another jurisdiction or even the whole country. I think a lobbyist will be better. Trade associations will be better. And then legislators are going to have to be much better. Meaning state level legislators who are likely about to have a lot more on their plates. In Washington, I'm Kimberly Adams for Marketplace. marketplace. Coming up. I ran away with the circus for a period of time and did Euro Circus shows around the world.

Add that to the list of things I want to do when I grow up. But first, let's do the numbers. There it is. The Dow Jones Industrial Average tumbled 1,033 points, 2.6% to land at 38,703. The NASDAQ dropped 576 points, 3.4%, to finish at 16,200. And the S&P 500 lost 160 points, 3%, to close at 5186. Alphabet, the parent company of Google, moved down 4.4%. A court ruled today that Google had violated anti-trust law with its dominant search business. Tyson Foods, meanwhile, added 2 and a tenth percent after posting better than expected adjusted earnings for the fiscal third quarter. The firm has cut production and shed jobs in the past year. It's also benefited from lower feed costs.

Rival food producer General Mills shed 1 and 4 tenths percent. Bond prices rose, the yield on the 10-year T-note fell to 3.78 percent. You're listening to Marketplace. This is Marketplace. I'm Kristin Schwab. Let's do an origin story of sorts about today's stock market sell-off, because it's a continuation of last week's slump, which was partly a continuation of a slump that started weeks ago, driven by big tech. Lately, investors have been taking a magnifying glass to the magnificent seven. That's Apple, Alphabet, Microsoft, Tesla, Meta, Amazon, and Nvidia. Investors have been questioning whether their impressive gains from earlier this year can really keep gaining.

Meanwhile, a curious thing happened. The hundreds of comparatively smaller companies in the S&P 500 sprang to life. Karen Langley is a reporter for The Wall Street Journal. She recently wrote about the shift in the stock market. She joins me now. Karen, welcome to the program. Thanks for having me. So let's start with what happened before we actually got to this turning point we're talking about. What made investors run to those magnificent seven stocks in the first place?

So in recent months, those big tech stocks, companies that we've all heard about like Microsoft, Amazon, Nvidia, they've really been powering the stock market to multiple records recently. And that's in large part because investors are so excited about the potential that these advances in artificial intelligence are going to really drive demand for the products and services that those companies offer. One other thing that has been making investors excited is just the fact that they are such big companies with really large markets, solid positions in those markets, that investors see those companies

as kind of sturdy, resilient places to be that won't be really susceptible to changing economic winds. So they've seen some of those big tech companies as safe places to be compared to other parts of the market. So at what point does everything kind of turn on its head and what happened? So a few weeks ago, there was an inflation report that came out that showed that inflation had been cooler than expected. And while investors have been closely following inflation data for a long time now, this report

sparked a sudden shift in the markets. You could see that investors were suddenly racing to trim their positions in those big tax stocks that have rallied so much and instead wanting to buy pieces of many of the smaller publicly traded companies that really had not been performing as well recently. Investors who I spoke with said that they saw these smaller companies as ones that were likely to benefit more if the Federal Reserve does now start cutting rates, you know, feeling that it's a battle against inflation has been successful and that the economy is ready for lower rates. How did economists and other investors react to that?

So the reason to the big tech stocks and the fact that they have been rallying and driving the market higher was something that investors expected would eventually turn, you know, no trade in the market lasts forever. And as there are shifts in the economy, investors want to be exposed to different kinds of industries and companies. I think that investors did not necessarily know that this would be one that the rotation within the market occurred. And I think there's still a vigorous debate about whether this will last. But a lot of other investors

who I speak with say that they do think that this shift towards smaller and more economically sensitive companies, you know, seeing success in the stock market with their share prices, that this could in fact persist as the Fed embarks upon lowering rates, you know, which tends to be more helpful to those smaller, maybe slightly less financially robust companies. I'm wondering if we put uncertainty aside a bit for a minute and just talk about whether we can characterize a shift like this as maybe good or bad. How do investors feel about the power kind of

shifting from seven companies to a broader group? It's interesting because a stock index like the S&P 500 is calculated so that it gives more influence to the largest companies, the Apples, the Microsofts. And so when we've been seeing these big tech stocks pull back recently, we've been seeing the S&P 500 dip somewhat. So people looking at their investment accounts may look and think, okay, is this bad news? However, many investors who I talk to have been a little bit nervous, a little bit concerned about the fact that a small handful of stocks have been the force that's driving the stock market's rally. The concern being that any

company, even a really great one, can always run into an individual problem. And so many of them are really pleased by this rotation to a broader number of stocks participating in the rally and feel like this could make for a more sustainable stock market advance going forward rather than one that might be vulnerable to one of the really big giants stumbling and then, you know, dragging down much for talking. Thanks. Let's turn to a diamond in the rough day of economic news. Exports. And a particular type of American export that's growing. Any guesses? Maybe you're picturing something like soybeans

or oil or airplane parts, something that's grown or made in the US and shipped abroad. Well, while goods do make up the bulk of American trade, services are a critical piece of the domestic economy, and they've been a positive contributor to GDP growth during almost every quarter over the past three years. So what kind of services are we exporting and why are we exporting more of them? Marketplace's Stephanie Hughes explains. Greg Gornaccia is a lighting designer. He started his career in theater, worked on Broadway for a while, and then?

I ran away with the circus for a period of time and did Euro circus shows around the world. From there, he got into architectural lighting, designing the setups in hotels, museums, outdoor stuff like monuments. He's based in Baltimore, but some of his work is international. He's designed lighting for performing arts centers in Morocco and Jordan. And he's learned a lot about cultural preferences around light. He says in the US, we like a warm tone. But if you go to places like Asia, Thailand, where the climate is very hot, you tend to see a lot of very cool lighting.

As a US resident with clients abroad, Gurnacha is a services exporter, even if he hasn't looked at it that way. Do you think of yourself as an exporter of services? You know, not until you've run it up. Gornaccia is sending his design across borders. But sometimes people from other countries are consuming the exported service while in the U.S. Say a French person comes to New York and buys a ticket to see the Statue of Liberty. In that sense, the Statue of Liberty is, she's providing that service. You can come and see

me. Christine McDaniel is an economist at George Mason University. She is also a services exporter. In her case, education. She teaches college courses to students from foreign countries. For instance, the applied econometrics class I'm teaching this fall, most of the students are international. And by the way, if Marketplace were to sell broadcast rights to this show overseas, then McDaniel says I'd be a services exporter too.

So you're creating the value. A U.S. person, U.S. entity is creating the value and the consumer is abroad. You're welcome, GDP. McDaniel says it makes sense that U.S. services exports are trending up. Advances in technology have made it easier to stream radio shows or send lighting designs across borders. And Cornell trade policy professor Ishwar Prasad says there are certain industries, like financial services and insurance, that the U.S. is known for. American banks are pretty good at what they do, even though we might think that they have

all sorts of problems. Prasad points out banks in the US are highly regulated. They've also got a lot of capital behind them. And not every country's workforce knows as much about wealth management or accounting workarounds. So we might have citizens in India, citizens in China and other countries looking to American firms to manage their money, provide insurance products and so on. LESLIE KENDRICK This demand is one reason why the U.S. has

a services surplus. That is, we export more services than we import. Economist Christine McDaniel says there are downsides to exporting services, like a greater risk of intellectual property theft. But there's one giant upside, more customers. CHRISTINE MCDANIEL So to the extent you can access those markets outside of our borders, you can really increase your market access and your revenues, help grow your company, and expand here at home as well. Lighting designer Greg Gornaccia says he'd like to become an even bigger exporter. He's added a partner in Costa Rica to help grow his international business.

He says one thing that helps is lighting design is still a relatively young industry. It's still hard to find lighting designers in many parts of the world. People are looking for expertise. And he says they're coming to him to find it. In Baltimore, I'm Stephanie Hughes from Arquibice. This final note on the way out today, a classic story of corporate finger pointing with no word yet on who's right, saw this in the Wall Street Journal. Remember that crowd strike chaos that led to a multi-day meltdown for Delta Airlines in July? That's been Delta's narrative about the situation. It's threatened to sue the cybersecurity company.

Delta says the outage cost about $500 million. Yesterday, the CrowdStrike lawyers responded, saying the airline was responsible for how it handled the delays and cancellations that came after. CrowdStrike notes that while most airlines were back to normal within a couple days, Delta struggled into the following week. Our daily production team includes Andy Corbin, Elise Hassan, Maria Hollenhorst, Sarah Leeson, Sean McHenry, and Sofia Terenzio. I'm Kristen Schwab. We'll be back tomorrow. This is APM.