The Daily - What Just Happened on Wall Street?

Episode Date: August 6, 2024

Every major U.S. stock market plunged on Monday, wiping out billions of dollars in value.Jeanna Smialek, who covers the U.S. economy for The Times, discusses what was behind the dizzying sell-off — and what it can tell us about whether America is headed for a recession.Guest: Jeanna Smialek, a reporter covering the Federal Reserve and the U.S. economy for The New York Times.Background reading: Global stock markets fell sharply — the latest example of how distinct economic forces can ricochet across markets.What should you do when the stock market drops? Here’s the advice from our columnist.For more information on today’s episode, visit nytimes.com/thedaily. Transcripts of each episode will be made available by the next workday. 

Hey, it's Michael. Before we get started, I want to share some exciting news about another daily news show from The Times called The Headlines. Here on The Daily, we tell one story a day. The Headlines, hosted by my colleague Tracy Mumford, brings you the day's top stories, along with insights and analysis that you've come to know from Times reporters in the newsroom, all in about 10 minutes, something you can listen to alongside the daily. Anyway, the news is that you can now find the headlines wherever you get your podcasts. So search for it and subscribe to it. And now, here's today's daily.

We have breaking news this hour. The stock market in some very troubling territory. Take a good look at your screen if you're moving around, because this is a live look at the Dow Jones Industrial Average, down over 800 points so far. My name is Gina Smilich. I'm the Fed and Economy reporter here at The New York Times, and I'm watching the markets here at The Open. Nearly everything on Wall Street is down. The S&P fell 1.8 percent. And the Nasdaq, the tech-heavy index where we've seen some of the biggest losses, that is down over 6 percent. And I have been watching them in real time as they plummet. They have never been down a thousand points ever, not even intraday on the Nasdaq. Is that true? That is true. Okay. And volatility is

just spiking across markets. Microsoft is down 5%. Alphabet, 5%. Meta, 6%. Apple, 9%. It's been a morning of just pure carnage. A relatively calm year on Wall Street is no more. From the New York Times, I'm Michael Barbaro. This is The Daily. York Times. I'm Michael Barbaro. This is The Daily. Today, why every major U.S. stock market plunged on Monday, wiping out hundreds of billions of dollars in value, and what the dizzying sell-off can tell us about whether the American economy is now headed for a recession. My colleague, Gina Smilick, is our guest. It's Tuesday, August 6th. Gina, let's start with the big question of the day. Why have the markets been utterly seized by panic and taken a huge nosedive over the past 24 hours?

And how does that fit into the larger economic story that we have been talking about, mostly with 2022, when the Federal Reserve started raising interest rates to bring down inflation, was can we get inflation down without causing a recession? Right. And up until very recently, it looked like the answer to that was basically yes. Inflation was coming down and the economy was still growing and the job market stayed strong. But over the past few days, we've gotten a couple of pretty important economic reports from the U.S. government that have suggested that the U.S. might not be steering clear of a recession to the degree that we had thought it had previously. So what we're seeing in markets today

is a reaction to that. And it's kind of been magnified by some technical things that are happening. But fundamentally, the story that we're seeing play out right now is people getting nervous that the U.S. might be headed for a recession. Okay, well, talk about those numbers that came out over the past few days that are fueling that worry that we might be headed for the recession that we have so far avoided for the past couple of years. Yeah, so it really started last Thursday, which is the day that we get our weekly jobless claims numbers. So as a reminder, these are new applications for unemployment benefits. They're sort of a proxy for people losing their jobs. And those jobless claims numbers jumped. By how much? Pretty significantly.

So they jumped by 14,000, which took them to the highest level in almost a year. Okay. So not a good number. Not a good number, but the claims data are pretty prone to big swings, especially during the summer. And so that wasn't enough in and of itself to cause people to be really, really nervous. What really made people nervous came on Friday. So on the first Friday of every month, we get the monthly jobs report. This is sort of the big indicator of how the job market is doing in any given month. And it gives you two really big numbers. The first is just the overall hiring number, how many people employers added to their payrolls over the past month. The second is the unemployment rate. And both of those metrics looked a little bit worse in this report than economists had expected.

So what we saw was people were hiring at a much less rapid pace than they had previously been. And the unemployment rate jumped up by a couple of tenths, which while it was only a little bit, it added to a pretty significant move up in the unemployment rate that's taken place over the past year and which has really been accelerating over the past six months. taken place over the past year and which has really been accelerating over the past six months. And so taken together, this set of data that we got on Friday, combined with the jumping claims we saw on Thursday and some other weakening data that we've seen in the job market, really put economy watchers on notice. You know, people are starting to put these numbers together and worry that the state of the job market is really deteriorating pretty quickly here. And that matters because the job market is really the clearest and the earliest signal of a recession. So in short, by the end of last week, the red lights are starting to flash and the panic is beginning to creep up.

I don't know if I'd call it panic, but definitely worries are starting to creep in. And compounding all of this, the Fed literally just reinforced their rate setting last week. They had a meeting on Wednesday, right before all of this bad labor market data came out, at which they decided to keep interest rates on hold at their current level, 5.3%, which is a two-decade high, because they wanted a little bit more confidence that inflation was coming under control. And they felt pretty good about the job market situation and thought it could handle a couple more months of high interest rates. And so it left rates on hold at this very high level just before we saw this deterioration in the job data. Got it. I want to put all this together because it's kind of fascinating.

So investors are processing a lot of information. By Friday of last week, they are seeing that the job market is slowing down. They will understand that is central to the question of whether or not we're headed for a recession. And they're processing that the government's most powerful tool for making the situation better, which is cutting interest rates, is not one that the Fed is going to employ right now. Maybe it will down the road. And obviously, that combination leads a bunch of investors to decide that this is a moment to look at their stocks and rather than hold on to them and hope they're going to keep going up, assume that bad things are ahead and they should sell them. Right. I think that's a big part of the

story. I think that investors are looking around and saying, yeah, we expect the Fed to cut rates in September. They were always going to cut rates in September, right? Like before before the sell off happened. Right. But is September going to be too late to avert a hard landing in the economy? Gina, that stock markets didn't just fall, but fell so much on Monday. A thousand points, for example, in the Dow alone. So I think there are a few reasons. All of this started in fundamentals and concerns over the state of the economy, but it pretty quickly became exacerbated by technical stuff. So the first is the different central banks are doing different things right now.

Japan is raising rates. The U.S. is talking about cutting them. And when Global Central Bank by technical stuff. So the first is the different central banks are doing different things right now. Japan is raising rates. The U.S. is talking about cutting them. And when global central bank policies diverge, you can really see currency values diverge as well. And that's relevant to markets because there are traders around the world who have positions that are based on the value of an underlying currency. And when those currencies move, you can see those traders have to pretty quickly unwind those positions and sell the assets. And so that's probably causing some of the selling we're seeing right now. Got it. Which is clearly something that happened over the past day. Yes. The second thing that's really important here is that stocks were just very high going into this. They had really been sort of buoyed up by optimism about things like artificial intelligence

and some of the big tech stories we've been talking about. And that means that they had a long way to fall. You know, there was just a lot of room for them to come down here. And then I think the final thing is that sometimes when you've got a sell-off in the market, selling leads to more selling. You've got a situation where some traders

are going to be looking at their positions and saying, off in the market, selling leads to more selling. You've got a situation where some traders are going to be looking at their positions and saying, uh-oh, we might have people sort of pull out of these or there will be a trigger at which they have to pull out of these if they keep falling. And so traders have to sell things in order to raise cash, in order to sort of meet those requests as they come in. And so I think that's what we've seen. We've seen a situation where the market moves are kind of snowballing upon themselves. So all that makes me wonder why the Federal Reserve, to avoid more selling off and to lessen all this anxiety, doesn't just get together and make an interest rate cut, right? Like do it tomorrow. Because wouldn't that bring stock prices right back up and kind of

make everything bad that just happened in all these markets go away? Right. The Fed does not set policy based on what is happening in the stock market. The Fed sets policy based on what is happening in the real economy. And when it comes to the real economy, I think they're not convinced that things are absolutely falling apart yet. And I think they worry that if they were to react very swiftly to this, if they were to make an interest rate cut in between their meetings, which is what we in the press call an emergency interest rate cut, they would really stoke the sense of panic. They would make people feel like they knew something, that like something was really going horribly wrong in the economy. And I just don't think that they feel confident that that is where we are at this point. This was one point of data,

and they are not ready to freak out, at least not yet. We'll be right back. So Gina, help us understand why the people who run the Federal Reserve can put aside all the panic in the markets and decide this is not a moment to pull on the emergency brake. Why do they see more strength than freaked out investors do in the U.S. economy right now? Right. I've talked to some Fed officials since the job market data came out on Friday. And I think that the overwhelming sense here is that they are wary. They are watching this data. They are watching for signs

that the job market is cracking. But at the same time, they're not panicking. So I think that the Fed is really at this moment taking a long view. And I think it's really important to review sort of how we got to this moment.

Back in 2021 and 2022, we saw inflation really start to take off as we were coming out of the pandemic recession. So we briefly had a very sharp slowdown in the U.S. The economy kind of rocketed back. And as the economy rocketed back, price increases really popped. Right. In part because the government spent so much money making sure that consumers could get through the pandemic recovery. Right. And in part because we had global supply chain problems and a whole variety of other issues that really sort of contributed to inflation. And the way that the Fed dealt with that was by starting in early 2022, raising interest rates really sharply in order to slow down the economy, bring inflation under

control. And when that happened, it was pretty broadly expected that they might cause a recession in the process. It's very hard to slow down the economy just enough to cool off inflation without slowing it down so much that you cause a recession. And so that was the big concern back in 2022 and 2023. If daily listeners listened to us back then, that was what we were talking about all the time was, is the Fed going to cause a hard landing? Because there's no such thing as a Goldilocks economy where you're trying to conquer inflation and you're somehow not inflicting damage on things like the employment market. We kept talking about that nonstop. It's impossible to get this just right. Yeah, it seemed very unlikely, especially based on sort of

historical precedent. But what we've seen is this really encouraging outlook late in 2023 and then early this year. We saw inflation coming down pretty nicely. We saw consumer spending really holding up. People are still taking vacations. They're still spending on a whole variety of goods and services. And we actually saw overall growth hold up. You know, we recently got a GDP number that showed that the economy expanded by 2.8% on an annual basis in the second quarter, which is pretty solid growth. soft landing we'd all been hoping for. And only recently, only in these last couple of data points with the creep up in the unemployment rate turning into something more serious and jobless claims starting to really take a move higher, I think have we started to consider that we might not be nailing the soft landing, that actually these things are in trouble. Okay, well, let's assume for the sake of argument that in the coming weeks and maybe month or so, more evidence comes the Fed's way suggesting that the economy is not doing well.

What can we anticipate the Fed's reaction will be if their thinking starts to turn the way of investors who have been selling off all these stocks? So we were already widely expecting a rate cut in September. Right. all these stocks. So we were already widely expecting a rate cut in September. I think most economists will tell you that given this slowdown in the job market, the question is how big that rate cut is going to be. So early on, we were expecting just a quarter point cut. But if you look at where markets are priced now, if you talk to most Fed watchers, they'll tell you that a larger rate cut is probably likely if the job market continues to slow down. So the Fed may decide that it needs to veer from its plan, this plan that's been working pretty well. And if they did cut interest rates more than they had previously said they would, would that be

an acknowledgement, Gina, that they have taken too long to act, that they have been too slow? I think that they would say that they never had a hard and fast plan at this stage. You know, I think policy in a moment like this has to be pretty reactive to the economic conditions. And they've been pretty clear about that for some time. And then I think the second thing is, yeah, to some extent, I think if you are getting signs that the job market is really slowing down, that you're moving a little bit late. When you're late, you play catch up. And so catch up would look like potentially larger interest rate decreases. And so I think that if that is what comes to pass, that's probably how people will read it. What's so interesting about this moment is that I think it's fair to say we tend to associate

bad economic moments, recessions, with big singular events you know 9-11 the collapse of the housing market the pandemic that's what we think of when we think about the u.s economy going into recession the idea that we might be heading into a recession now is just fundamentally weirder because if it happens it will have been because our government successfully staved it off for a few years through this very delicate process of raising interest rates to fight inflation. And the idea is that eventually it can't keep a lid on this, right? You know, cat in the hat style, the plates and the balls and the rakes, they all fall. And it's going to be harder to assign blame for that if and when it happens. Yeah. So recently, the recessions that we've been

having have been a little bit different. They've really been caused by these big external events. So in the most recent instance, obviously, that was a pandemic. But putting on my economics nerd hat here a little bit, as is my lot in life, I think I would actually compare this most to the early 1980s recession. That was a pretty bad one. And I'm not going to say that this moment would necessarily be that bad. But what is similar here is that it was a moment of economic slowdown that was really caused by the Fed's attempts to control inflation. And I think that this would be a very similar episode. And in that instance, everybody blamed the Fed and Paul Volcker for raising interest rates and causing a recession. And he was not a popular figure during it. And it was very much seen as a huge policy problem people came to see it as the Fed having successfully contained inflation. You know, the reviews of that 1980s recession got a little bit sunnier with time.

And so I think there'd be a real question, you know, is this episode seen similarly? Do people think that the Fed has made a huge policy error and that this is a big mistake and that we should all roundly blame them? Or do people see this as sort of a necessary evil that they caused a hard landing, but they had to do it to get inflation under control? I think those are big questions, and they'll matter a lot for the legacy of Jerome Powell, who's the current Fed chair, and who has been getting a lot of plaudits recently for having gently landed the plane. I think if it turns out that the plane is in for actually a hard landing, there are going to be some questions about his legacy here.

Questions that it seems really began to crystallize on Monday. Yeah, I would say that's the case. So I don't think we can end this conversation without recognizing that this stock market sell-off and the fears of a recession that underlie it are occurring in the middle of a general election for president. And a lot has changed in that race over the past few weeks. Almost all of it pretty positive for the Democrats who are the incumbents in this race. But incumbents are almost always seen as responsible for the economy and, by extension,

the stock market, which, as we are discussing, is in some real turmoil as of Monday. And it feels worth lingering on all of that for just a moment. Yeah. So there is a big question here over who is going to own this moment. You know, I think we've got a complicated situation because the incumbent president, Joe Biden, is not running for reelection. His vice president, Kamala Harris, is. But are voters going to attribute this to her? Are they going to blame the stock market sell-off on her? I don't think that's entirely clear. We've seen former President Donald Trump, the Republican candidate, really trying to pin this on Kamala Harris. But is that going to carry water? I think that's an open question. And then just to add to all of this political complication, you've got the Fed preparing to cut interest rates.

Some investors and economists think it's likely that they're going to go both in September and in November, just a couple of days after the election. And that's complicated because the Fed is independent of the political situation. You know, they are not beholden to the White House. And they try to be very clear that they're politically independent. But this is going to plunge them right into the political fray right around the election.

President Trump has already said that and implied that cutting interest rates near the election would be a political attempt to help the Democrats. The Democrats are very carefully not talking about the Fed at the moment. But I think that this is going to be just a very fraught moment for the Fed politically going forward here.

Right, because we may have a situation where one side is rooting for the Fed to do what it thinks will help them, and the other side may be rooting for the Fed not to do it because it may help the opponent. Right, and then I think to add complication to the situation, I think no matter what side you're on, you're kind of hoping that the Fed manages to pull this off and not cause a recession,

because what president wants to be in office next year during a recession? You know, recessions don't clear up in 25 seconds. There are just layers upon layers of political complication here. So this current economic moment is really playing out on multiple levels. There's this Fed level, you know, the Fed's removed from politics, but its legacy and its reputation are very much on the line here. There's this political level, the White House doesn't really have all that much control over this situation, but the outcome of the presidential election is ultimately going to be pretty potentially shaped by it. And then, of course, there's this sort of human level.

The American people are going to be directly and potentially pretty profoundly affected by the outcome. Gina, as always, thank you very much. Thank you, Michael. We'll be right back. We'll be right back. The decision endorsed claims made by the U.S. government that Google has denied its competitors a chance to grow by spending billions of dollars a year to become the automatic search engine on many consumer devices. The ruling does not offer remedies for Google's behavior, which will be decided in the coming months. But those remedies could eventually include forcing Google to sell off parts of its business. And... The prime minister of Bangladesh, Sheikh Hasina,

has resigned and fled the country as protesters stormed her residence and set fire to government offices. Protesters stormed her residence and set fire to government offices. It was a dramatic end to Hasina's reign, which has become increasingly authoritarian, prompting massive protests and violent government crackdowns in the days before her ouster. Today's episode was produced by Ricky Nowetzki and Shannon Lin. It was edited by Liz O'Balen with help from Lisa Chow. Contains original music by Marian Lozano and Diane Wong

and was engineered by Alyssa Moxley. Our theme music is by Jim Brunberg and Ben Landefurk of Wonderly. That's it for The Daily. I'm Michael Balloro. See you tomorrow.