August began with a global stock market plunge similar to the 1987 Black Monday crash, which severely damaged Wall Street at the time. As many people anticipated, the US stock markets also fell sharply, on August 5th, followed the falls in Europe and Asia. Along with multiple other countries, Japan is one of the most key ones that affected and was impacted by this market plummet. There are some several reasons behind these, and also an explanation behind them.
Behind the drop, there were seven well-known technology companies: the so-called magnificent seven, including Apple, Google parent company Alphabet, Amazon, Meta, Microsoft, Nvidia, and Tesla. These seven companies make the most of the Nasdaq Composite. Therefore, a downfall in their stock market eventually led to a fall in the market for many other companies. The decrease in the value is depicted the graph below, it covers the time between July 6 and August 6.
Starting with Asia, as suggested, the fear of an American recession spreading is one of the main reasons. Compared to the United States, the drop in Asia was steeper. TOPIX, Tokyo Stock Price Index, got severely affected by this. Since TOPIX is a market benchmark, as well as being an investable index, it covers a significant portion of the whole Japanese stock market. Therefore, it is possible to say that TOPIX serves as an indicator for investing in Japanese stocks and gives an overview of the general trend in the stock market. On Monday, August 5th, the TOPIX plunged by 13%, coming to its worst state since 1987. It is now almost a quarter below its best, which was reached only a month ago. In contrast, the value of the Japanese currency, Yen, increased by 12% from its lowest point in 37 years. This showcased a great fall in the Japanese economy and with the decrease in the value of Yen, many people are going through hard times in their daily activities that regards their currency’s value, some of them experiencing a downfall in their purchasing power.
Foreign investors were attracted to the Japanese stock market by the weaker currency, which also increased the foreign revenue of Japanese companies. In a way, they are doing “carry trade”, in which investors borrow cheaply in Yen to make bigger investments in other currencies. When the status lightened slightly, the Bank of Japan decided to tighten its policy, and on July 31st, they raised the benchmark from 0.1% to 0.25%.
Furthermore, KOSPI, The Korea Composite Stock Price Index, dropped more than 9%. TAIEX, Taiwan Stock Exchange Capitalization Weighted Stock Index, decreased by 8.4%. Similarly, Singapore, Indonesia, and Thailand markets experienced falls, however, to a lesser extend.
Since the market plummet became a global issue, exchange rates in some European countries, including but not limited to France, Germany, Spain also dropped around 3%. However, it is possible to say that the euro gained strength against many other major currencies.
According to an Economics Editor in MarketWatch, William Watts, the recovery process is expected to be a “bumpy ride”. And, the fact that Wall Street sees best day of trading in nearly two years amid recovery, proves this point. However, coming to more recent data, many countries were able to start taking steps for improvement, and entering to an extensive recovery stage. Several markets in Asia started recovering, KOSPI gained around 3%, and the Shanghai and Shenzhen markets in China increased by 0.2% and 0.8%.
The steps taken until now definitely had to be followed. However, analysts say that there is still a lot to do.
The markets and the index are now expecting the Fed to drop interest rates by 50 basis points in the September meeting, to contribute to the stability of the economic state. International responses suggest that with the increased volatility, investors prepare for upcoming economic reports, and the responses of the analysts, since they will be monitoring the situation cautiously to recover as soon as possible.
While Goldman Sachs analysts claimed that investors have become less cautious and started to interpret “bad news as good news”, Eric Freedman, chief investment officer for U.S. Bank Wealth Management, expressed his opinions “Despite the negative market action, we don’t believe that there’s a reason for equity investors to exercise significant caution. We still think it’s a great time to be invested and for those with money in cash, it represents an opportunity to put capital to work in longer-term assets.” Therefore, it is possible to say that, many thinks that there will not be a significant problem in the investment activities, and especially long term investments will be effective. The recovery stage for this stays unknown, since it solely depends on the success of the existing or emerging management plans and the following years will show us the results of the long-term effects and investments.