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Happy Monday! Financial markets are freaking out, but you shouldn’t be. We’ll explain, but first, we want to note that on this date 163 years ago, Abraham Lincoln signed the Revenue Act of 1861, which included the nation’s first income tax, to help fund the Civil War effort. The legislation imposed a 3% tax on individual incomes over $800, though it did not provide for an enforcement mechanism and wound up generating little additional money for the government, though it did lay the groundwork for a more effective revenue law the following year.
Here's more on the markets and what else we’re watching while we wait for Vice President Kamala Harris, the presumptive Democratic presidential nominee, to announce her running mate.
Recession Fears (and More) Rock World Markets
Investors spooked by a weaker-than-expected jobs report on Friday sent global stock markets spiraling lower Monday, raising new questions about the strength of the U.S. economy and the Federal Reserve’s ability to achieve its goal of a “soft landing” from the pandemic-era inflationary surge.
Japan started the ball rolling downhill early on, with the Nikkei index plunging 12.4% for its worst one-day loss since Black Monday in 1987.
U.S. investors followed suit, sending the Dow Jones Industrial Average down by more than 1,000 points, or 2.6%, with the broader S&P 500 falling 160 points (3.0%) and the tech-heavy Nasdaq dropping 576 points (3.4%). It was the worst daily percentage loss for the Dow and the S&P since 2022. Crypto assets plummeted, as well, with Bitcoin tumbling about 9%. Interest rates also moved lower as investors plowed into safe assets, with the 10-year Treasury yield dropping to its lowest level in more than a year.
Market analysts listed multiple sources of concern driving the selloff. The weakening job market in the U.S. was cited as a potential recession signal, made more dire by the Federal Reserve’s decision to hold interest rates steady rather than cutting them at its meeting last week — a decision that came just days before surprisingly weak results for hiring in July. Investors have also been worried about tepid corporate earnings, which threaten to undermine sky-high valuations, and a runup in tech stocks driven by what some say is an unwarranted faith in the productive potential of artificial intelligence.
But the biggest factor could be the unwinding of the Japanese carry trade, in which investors borrow at low rates in Japan and invest at higher rates elsewhere. Rising interest rates in Japan and a strengthening of the yen are undermining that trade, causing ripples throughout the world as investors unwound their positions.
In the end, there was plenty of blame to go around. “It’s just a perfect storm of slowing growth, crowded positioning and risk-off sentiment that’s all coming to a head at the same time,” John Belton, portfolio manager at Gabelli Funds, told CNBC.
An overreaction? While they may have contributed to Monday’s big selloff, Wall Street traders are not the only ones with opinions about the economy. As University of Michigan economist Justin Wolfers told CNN, market participants are focused on the short-term ups and downs of the market. Economists, on the other hand, are more interested in things like wages, employment, incomes and spending. “And all of the actual data about the economy tell us that this is an economy that is currently doing pretty well,” Wolfers said.
Wolfers added that there are two ways to make sense of the split between markets plunging and an economy that appears to be in decent if not spectacular shape. “It could be that financial market guys are looking ahead and they see danger in the future that the rest of us can’t quite see,” he said. “Or it could be that for about the 400 millionth time they’re having a freakout, and it’s a big freakout, it’s a messy freakout, but it’s not one that fundamentally affects yours or my lives.”
RSM Chief Economist Joseph Brusuelas took a similar view, saying Monday’s market was “a good old-fashioned market panic” rather than a signal of recession. “This has little to do with that soft jobs report & has everything to do with the unwinding of massive leverage associated with the yen based carry trade,” he wrote. “The [Bank of Japan] & Fed are moving to normalize policy and the massive deleveraging associated with easy money is going through a period of adjustment. Private credit, commodities & oil will all have their days of adjustment going forward too.”
The longer-term view could influence the Fed to take a more cautious approach than some investors would like to see. “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, per the Associated Press. “Those are usually reserved for emergencies, like COVID, and an unemployment rate of 4.3% doesn’t really seem like an emergency.”
Investors are now betting that the Fed will cut rates by half a percentage point at its next meeting, in mid-September, rather than the 25 basis points previously expected. “They clearly made a mistake,” Mark Zandi, chief economist at Moody’s Analytics, told CNN. “That’s, now, I think, obvious to everyone — including them. And I think they’re going to respond” at their next meeting.
The politics of the plunge: Whatever the cause of the selloff, Republican presidential challenger Donald Trump wasted no time gloating about it and blaming Vice President Kamala Harris. “STOCK MARKETS CRASHING,” he wrote on his social network. “I TOLD YOU SO!!! KAMALA DOESN’T HAVE A CLUE. BIDEN IS SOUND ASLEEP. ALL CAUSED BY INEPT U.S. LEADERSHIP!”
Earlier this year, Trump attempted to take credit for the strong market performance, claiming that stocks were hitting record highs because investors were sure that he was going to win the election in November. But on Monday, he quickly denied any connection to the market, and instead raised the alarm about the “KAMALA CRASH.” He also warned of “THE GREAT DEPRESSION OF 2024!”
Sen. JD Vance, the Republican vice-presidential candidate, joined in, saying the selloff “could set off a real economic calamity around the globe” while questioning Harris’s ability to handle the situation.
The apocalyptic tone from the Republican nominees was too much for some observers. Wolfers, for one, pointed out how Monday’s big stock losses were relatively minor in the larger scheme of things. “The S&P 500 is down -3% so far today, or as I like to say, up only +9% so far through 2024, up +14% over the past twelve months, or +55% since Trump left office.”
Still, bad news in the stock market could hurt Harris as the election draws nearer, even as stocks remain fairly close to the record highs hit just a few weeks ago. Although the Trump campaign has stumbled in recent weeks with Harris riding a wave of enthusiasm, voters say they trust Trump more when it comes to the economy.
Numbers of the Day
$15 Billion: The Wall Street Journal reports that Medicare Advantage insurers collected about $15 billion extra from 2019 to 2021 by sending nurses into the homes of Medicare recipients — not to treat patients but to run screening tests and ask questions that result in new diagnoses that allow the companies to get additional payments from the government insurance program. “Sixty percent of UnitedHealth home visits generated at least one new revenue-producing diagnosis of a condition no doctor was treating,” the Journal analysis found. “Home visits by Humana, the No. 2 Medicare insurer, did so 39% of the time.”
7%: Health insurers offering Affordable Care Act marketplace plans are proposing a median premium increase of 7% for 2025, according to a new analysis by KFF, a nonprofit focused on the healthcare system. The analysis, based on preliminary filings by 324 insurers, finds that the proposed increase is similar to last year’s 6% median rise. Most proposed rate changes for 2025 fall between about 2% and 10%, KFF found, though 50 insurers proposed decreasing premiums and 85 insurers are seeking increases of more than 10%. Insurers cite inflation, increased use of popular weight-loss drugs including Ozempic and Wegovy, hospital market consolidation and workforce shortages as driving the need for higher premiums. The analysis notes that the vast majority of enrollees in the ACA marketplace benefit from subsidies and are not expected to face the higher costs, but the premium increases generally lead to higher federal spending on those subsidies.
Fiscal News Roundup
- Dow Drops 1,000, and Japanese Stocks Suffer Worst Crash Since 1987 as Markets Quake Around the World – Associated Press
- Global Markets Are Reeling, but Economists Say: Don’t Panic Yet – Washington Post
- Traders Bet on Fed Emergency Rate Cuts, but Officials Need More to React – New York Times
- Treasuries Surge as Traders Bet on Emergency Fed Rate Cut – Bloomberg
- The Sahm Rule Points to a Recession. Here’s What the Rule Maker Thinks – New York Times
- Sanders Poll Shows GOP Support for Wealth Tax, $17 Minimum Wage in Swing States – The Hill
- A Chief Architect of Project 2025 Is Ready to Shock Washington if Donald Trump Wins a Second Term – Associated Press
- Hospitality Workers’ Union Endorses Harris, Dismissing Trump’s Pledge of Tax-Free Tips – Associated Press
- Harris Tops Trump for First Time in Nate Silver’s Election Forecast – The Hill
- The One-Hour Nurse Visits That Let Insurers Collect $15 Billion From Medicare – Wall Street Journal
- Medicare Scrambles to Keep Prescription Drug Plan Premiums Stable Ahead of Elections – STAT
- The IRS Has Opened Its Free Tax Filing for All States. Which Ones Will Join? – Washington Post
- Coca-Cola to Pay $6 Billion in IRS Back Taxes Case While Appealing Judge’s Decision – Associated Press
- RFK Jr. Admits He Placed a Dead Bear Cub in Central Park 10 Years Ago – CNN
Views and Analysis
- What the Market Turmoil Means for the Fed’s ‘Soft Landing’ Goal – Steve Matthews, Bloomberg
- An Emergency Fed Rate Cut Would Be a Mistake – Marcus Ashworth, Bloomberg
- Unemployment Rise Spurs Fears of Slowdown, Yet Recession Signals Have Been Wrong – So Far – Christopher Rugaber and Paul Wiseman, Associated Press
- Plunging Stocks, Slowing Growth: Making Sense of the Market Turbulence – Victoria Guida, Politico
- Why the Stock Market Is Freaking Out Again – David Goldman, CNN
- The Stock Market Dropped, but Don’t Freak Out – Peter Coy, New York Times
- The Easy Money Reckoning Arrives – Wall Street Journal Editorial Board
- The Next Month in the Economy Could Be Crucial for the Presidential Election – Jim Tankersley, New York Times
- What Is the Yen Carry Trade? – Chelsea Dulaney, Wall Street Journal
- The Presidential Race Shifts — Modestly, So Far — Toward Harris – Philip Bump, Washington Post
- Trump Goes Low as Harris Gains Ground – Adam Wren, Myah Ward and Jared Mitovich, Politico
- Can Kamala Harris Win Just Enough of the Working Class? – Benjamin Hart, New York
- Harris’ California Health Care Battles Signal Fights Ahead for Hospitals if She Wins – Bernard J. Wolfson and Phil Galewitz, KFF Health News