The market crash on Monday, August 5, was an awful event and it may yet end up becoming even worse than that. Meanwhile, Wall Street carries on as usual.
The downturn began in July but picked up steam at the onset of the Nine Days, not an unusual time for this kind of news. That Monday, the Dow plunged 1034 points, or 2.6%, the largest decline in nearly two years. The selloff was not a complete surprise. Stocks had been wobbly for a few weeks and that morning futures were pointing to a sharply lower opening so it was clear stocks were going to get a potch.
Those who follow developments in overseas markets realized even earlier that it would be a painful day. The Nikkei, a market index for the Tokyo Stock Exchange, suffered its worst decline since 1987 and panic also spread to other markets. Many investors decided this was a situation where discretion would be the better part of valor and moved their portfolios to safer harbors. Global markets were shaken but all of us should be grateful they didn’t collapse entirely.
When markets experience extreme volatility, it’s always a good idea to take a step back and try to understand what’s going on.
Early Twenties Rewind
When the pandemic began spreading in March 2020, the world entered a new phase. People began using words they never did before, like “vaccinations,” “masks,” “social distancing,” and “lockdowns.” Schools, stores, and other businesses were forced to close, creating terrible and unprecedented problems for the economy and for people.
The virus didn’t play better on Wall Street than it did on Main Street, as the Dow suffered one massive meltdown after another. Federal and local governments responded with stimulus checks to prevent mass bankruptcies that would overwhelm the economy. They helped, but all this government spending added trillions to the deficit and set the stage for soaring inflation.
In this regard, the Fed did its job too good. “The Fed kept interest rates artificially low while building a truly massive debt bubble,” explains CPA and market commentator Lena Petrova.
Regarding the current situation, many economists say the plunge on the Nikkei resulted from a change in policy on interest rates. Others say that economic news released in the U.S. the Friday before was disappointing, and some investors believed it indicated a massive economic slowdown was about to hit the U.S.
The statistics measuring the decline were awful whatever the cause. At the worst of the selloff that Monday, tech stocks alone had shed more than $1 trillion of their market caps. The valuations of the so-called “Magnificent 7” stocks lost $3 trillion from their record highs.
Other statistics bear these out. During the first three trading sessions in August alone, the Dow shed 5.24% of its value, while the tech-heavy NASDAQ lost 7.95%, and the S&P 500 gave back 6.08% – each of these pullbacks were the worst since mid-June 2022, when the pandemic was still raging, the market swooning, and no one knew when/if life would ever get back to normal.
Tough Day For Crypto, Too
Incidentally, stocks were not the only asset class that got pummeled; crypto also took it on the chin. Bitcoin, for example, which certainly had a following on Wall Street, withered in the summer heat. In just a few days, it plunged by thousands of dollars, dropping from the low $60,000s to the high $50,000s and then to “just” $50,000 before finally finding support. However, by that point, many investors had lost confidence in it.
“The dramatic drop in Bitcoin in my opinion makes clear that it can never become a true safe haven asset or reserve asset due to its extreme volatility,” Petrova said.
The plunge in U.S. stocks on Monday gave way to a modest rebound on Tuesday of just 294 points – not convincing following the rout the day before. On Wednesday, what started out with a modest gain turned into a loss of 234 points, suggesting that investors were still jittery. But on Thursday, the market finally put together a rally that was more impressive, with the Dow adding 683 points. But stocks were little changed on Friday.
While these gains eased some investors’ anxieties, the rebound still left many with losses and suggested fear that something worse than a correction might be in the works.
Modest Good News
Maybe the best news of the week was that, despite the turmoil, the sky didn’t fall, the market didn’t crash, and no major Wall Street firm suffered the fate Bear Stearns and Lehman Bros. did. These are not small blessings.
There probably are experts who will explain the Monday massacre with a positive spin, but to armchair analysts there’s no reason to sound the “all clear” yet. In fact, little (read: nothing) has been done to resolve the very serious economic problems that are challenging our economy, institutions and the average guy and gal on The Street. In other words, the one-day plunge may have been more of a warning shot to investors about what may be coming than a serious correction that began and ended in a single day.
Why would anyone think the decline is over? The following are a few points to consider.
According to the Peter G. Peterson Foundation, in 2023 the federal government paid $658 billion interest on the national debt, 38% more than it did in in 2022.
The Congressional Budget Office estimates interest will rise to $892 billion this year and continue rising rapidly for the next decade, climbing past $1 trillion in 2025 and to $1.7 trillion in 2034. During this time, it will have paid $12.97 trillion in interest.
In addition, there is a commercial real estate loans crisis, auto repos are soaring, credit card debt is skyrocketing, and the national debt is rising by more than $1 trillion every three months – among other serious problems.
The time is coming when investors will be able to breathe a sigh of relief, but we’re not there yet. Meanwhile, it makes little sense to test one’s courage in this atmosphere.
Sources: bloomberg.com; cnbc.com; economiccollapseblog.com; pgpf.org; unherd.com; zerohedge.com; YouTube: Elana Petrova, This Is John Williams
Gerald Harris is a financial and feature writer. Gerald can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.
