Wall Street has its worst day since 2022 as fear of a US economic slowdown deepens; Dow sinks 1,000

Wall Street fell the most on Monday in nearly two years, continuing a global rout in financial markets, as fear worsened that the U.S. economy was slowing down. 

The S&P 500 fell 3%. The Dow Jones Industrial Average dropped more than 1,000 points, and the Nasdaq composite slid 3.4%.

That followed a 12.4% plunge for Japan’s Nikkei 225, its worst day since 1987. 

Worries about the economy are front and center after a series of disappointing reports, including a weaker-than-expected jobs report on Friday. Big Tech stocks, which have led the market to record after record this year, bore the brunt of the selling.

The scary Monday that started with a plunge abroad reminiscent of 1987 's crash swept around the world and pummeled Wall Street. Nearly everything on Wall Street tumbled as concern about a slowing U.S. economy set off another sell-off for financial markets.

Monday was the first chance for traders in Tokyo to react to Friday’s report showing U.S. employers slowed their hiring last month by much more than economists expected. That was the latest piece of data on the U.S. economy to come in weaker than expected, and it’s all raised fear the Federal Reserve has pressed the brakes on the U.S. economy by too much for too long through high interest rates in hopes of stifling inflation.

Professional investors cautioned that some technical factors might have amplified the action in markets, and that the drops may be overdone, but the losses elsewhere in the world were nearly as neck-snapping. South Korea’s Kospi index careened 8.8% lower, stock markets across Europe sank roughly 3% and bitcoin dropped 12%.

Even gold, which has a reputation for offering safety during tumultuous times, slipped nearly 2%.

That’s in part because traders are wondering if the damage has been so severe that the Federal Reserve will have to cut interest rates in an emergency meeting, before its next scheduled decision on Sept. 18. The yield on the two-year Treasury, which closely tracks expectations for the Fed, fell to 3.74% from 3.88% late Friday and from 5% in April.

“The Fed could ride in on a white horse to save the day with a big rate cut, but the case for an inter-meeting cut seems flimsy,” said Brian Jacobsen, chief economist at Annex Wealth Management. “Those are usually reserved for emergencies, like COVID, and an unemployment rate of 4.3% doesn’t really seem like an emergency.”

Of course, the U.S. economy is still growing, and a recession is far from assured. The Fed has been clear about the tightrope it began walking when it started hiking rates sharply in March 2022: Being too aggressive would choke the economy, but going too soft would give inflation more oxygen and hurt everyone.

After leaving the federal funds rate steady last week, before several discouraging economic reports hit, Fed Chair Jerome Powell said officials “have a lot of room to respond if we were to see weakness” in the job market after raising their main rate to the highest level in more than two decades.

Goldman Sachs economist David Mericle sees a higher chance of a recession following Friday’s jobs report. But he still sees only a 25% chance of that, up from 10%, in part “because the data look fine overall” and he does not “see major financial imbalances.”

Some of Wall Street's recent declines may simply be air coming out of a stock market that romped to dozens of all-time highs this year, in part on a frenzy around artificial-intelligence technology and hopes for coming cuts to interest rates. Critics have been saying for a while that the stock market looked expensive after prices rose faster than corporate profits.

“Markets tend to move higher like they’re climbing stairs, and they go down like they’re falling out a window,” according to JJ Kinahan, CEO of IG North America, who chalks much of the recent worries to euphoria around AI subsiding amid “a market that was ahead of itself.”

Professional investors also pointed to the Bank of Japan's move last week to raise its main interest rate from nearly zero. Such a move helps boost the value of the Japanese yen, but it could also force traders to scramble out of deals where they borrowed money for virtually no cost in Japan and invested it elsewhere around the world.

U.S. stocks briefly pared their losses a bit Monday after a report said growth for U.S. services businesses was a touch stronger than expected. Growth was led by businesses in the arts, entertainment and recreation businesses, along with accommodations and food services, according to the Institute for Supply Management. Treasury yields also pared their drops following the better-than-expected data.

Still, stocks of companies whose profits are most closely tied to the economy’s strength took heavy losses on the fears about a sharp slowdown. The small companies in the Russell 2000 index dropped 5.5%, further dousing what had been a revival for it and other beaten-down areas of the market.

Making things worse for Wall Street, Big Tech stocks also tumbled sharply as the market’s most popular trade for much of this year continued to unravel.

Apple, Nvidia and a handful of other Big Tech stocks known as the “ Magnificent Seven ” had propelled the S&P 500 to dozens of all-time highs this year, in part on a frenzy around artificial-intelligence technology. They were so strong that they overshadowed weakness for areas of the stock market weighed down by high interest rates.

But Big Tech’s momentum turned last month on worries investors had taken their prices too high and expectations for future growth are becoming too difficult to meet. A set of underwhelming profit reports from Tesla and Alphabet added to the pessimism and accelerated the declines.

Apple fell 6.8% Monday after Warren Buffett’s Berkshire Hathaway disclosed that it had slashed its ownership stake in the iPhone maker.

Nvidia, the chip company that’s become the poster child of Wall Street’s AI bonanza, fell even more, 11%. Analysts cut their profit forecasts over the weekend for the company after a report from The Information said Nvidia’s new AI chip is delayed. It has trimmed its gain for the year to 92.7% from 170% in the middle of June.

Because the Magnificent Seven companies have grown to be the market’s biggest by market value, the movements for their stocks carry much more weight on the S&P 500 and other indexes. Nvidia, Apple, Microsoft and Amazon were the heaviest weights on the S&P 500.

Worries outside corporate profits, interest rates and the economy are also weighing on the market. The Israel-Hamas war may be worsening, which beyond its human toll could also cause sharp swings for the price of oil. That’s adding to broader worries about potential hotspots around the world, while upcoming U.S. elections could further scramble things.

Wall Street has been concerned about how policies coming out of November could impact markets, but the sharp swings for stock prices could also affect the election itself.

The market turmoil and concerns about a weakening economy are likely to scramble a presidential race that has so far been focused mostly on immigration and inflation.

The threat of a recession is likely to put Vice President Kamala Harris on the defensive. But slower growth could also further reduce inflation and force former President Donald Trump to pivot from his current focus on higher prices to outlining ways to revive the economy.

AP Business Writers Elaine Kurtenbach and Matt Ott contributed.