A local financial expert is reassuring investors that Monday’s market decline is likely a correction and is not indicative of a global recession.
The week on Wall Street started with the Dow Jones Industrial Average toppling 1,000 points while the Nasdaq Composite was slashed by 5% and the S&P 500 shed $1.3 trillion in value. Global markets also tumbled as Japanese exchange Nikkei fell 12.4% – the worst drop since 1987 – along with France’s CAC 40 and Germany’s DAX declining 2.78% and 2.84%, respectively.
Jeremy Nelson, a partner at Element Wealth in Ridgeland, shared on MidDays with Gerard Gibert that trends had been pointing to a correction for several years and were recently punctuated by an increased unemployment report released last week in the U.S.
“The reality is that some of this has to do with the economic data we got,” Nelson said. “But, more than anything, this is a massive unwind of leverage in the global financial system.”
Nelson explained that the primary catalyst of the dip has been the reliance on the Japanese Yen over the last several years. Since the 1990s, Japan has held onto remarkably low interest rates, allowing borrowers to get loans for next to nothing. Institutions and individuals alike would then invest their borrowed money into the markets.
However, when Japanese monetary policy became more restrictive to strengthen the currency, it resulted in a global selling trend that dinged markets across the world. That being said, the financial expert does not believe the dip points to an incoming recession.
“If you are a long-term investor, you have to look at where you were at the beginning of the year or even in October – you’re still okay,” Nelson said. “This is not a bear market yet; this is a correction, and sometimes, market corrections happen really rapidly. The number one thing is to not be emotional.”
The U.S. briefly bounced back during Monday’s trading hours but not enough to counteract each of the major indexes that recorded their worst day since 2022 after the market closed. With a historic market surge since 2020, along with increased pressure on consumers due to inflation, Nelson said the current plunge isn’t surprising.
“Nothing goes straight up,” Nelson said of the major stocks that fell after years of growth. “This is something we’ve been concerned about for a while.
“The COVID money is now gone. So, we’re at a point where we didn’t get a recession from the higher interest rates in 2022 and 2023. But a lot of that had to do with the fact that you had all this money sitting in people’s checking accounts. That money is gone now. You’re starting to see a little bit of stress on the consumer.”
Eyes now turn to the Federal Reserve and whether Chairman Jerome Powell will slash rates faster than previously expected. According to CME Group, traders see an 85% expectation that the Federal Reserve will cut rates by half a point at its next scheduled meeting in September. While some are calling for an emergency meeting to cut rates, Nelson thinks it would only feed into the panic and create an even tighter market.
As a landmark presidential election looms, Americans are paying keen attention to how the economy is affecting their wallets. Nelson used the example of John McCain’s poll lead on Barack Obama before the market crash of 2008, which directly contributed to voters losing faith in a then-Republican administration and McCain quickly losing steam.
“People vote with their pocketbook,” Nelson concluded. “What happens between now and let’s say Halloween, or maybe a little earlier, that’s how people are going to feel about the economy [when they vote]. That’s going to tilt some of those moderates in the swing states. If the market were to continue to weaken, that’s going to result in a loss of confidence in the current administration.”
