Equity markets have been falling over the last week as disappointing earnings from technology companies and concerns regarding slowing job growth have caused investors to sell many of the securities that have shown the most growth since the beginning of the year. The sell-off is happening despite many indicators showing that the economy continues to grow.
Disappointing earnings from Microsoft and Amazon last week caused worries that earnings from A.I. businesses may take longer to develop. On Friday, markets fell in reaction to a weaker-than-expected jobs report, which fueled concerns that the Federal Reserve has kept interest rates too high, increasing the risk of an economic slowdown. The markets also fell in response to a surprise move by the Bank of Japan last week, which raised its benchmark short-term interest rate. Many investors have been borrowing money in Japan to invest in other markets, and the rise could cause investors to sell securities in the U.S. and other global markets.
Currently, the S&P 500 is down 8.7% from its high in July, and the Nasdaq, more heavily weighted in technology companies, is down 13.4%. The 10-year U.S. treasury note yield has fallen to 3.74%, down from its high of 4.70% in April.
Fundamentally, while the economy has slowed in terms of job growth, other economic indicators point to a growing economy. Personal consumption expenditures continue to grow at 2.5% above inflation, and corporate earnings are expected to grow at a relatively strong 4.70% this quarter. Despite the sell-off, the S&P 500 is still up close to 10% year to date and up over 15% over the last 12 months. Corporate bond spreads have also stayed relatively steady, indicating that a recession is not a near-term risk.
The market now places a 95% probability that the Fed will lower short-term rates to less than 4.50%, a reduction of over 1.00% from the current 5.5% target. Reducing short-term rates will help consumers and the housing market by making borrowing money less expensive.
Overall, while the fall in equity prices has happened relatively quickly, it is in line with historical downturns. Long-term investors who rebalance their portfolios regularly and stick to their investment plan can benefit from this downturn.