The last week has been a wild one in the stock market, with the Dow Jones Industrial Average seeing its worst daily point performance in two years on Monday and the Japanese Nikkei 500 tumbling 12% in just one session, the worst drop there since 1987.
What’s going on?
“A major factor behind the turbulence is the ‘yen carry trade,'” explained Cal State Fullerton Professor of Finance Ajay Bhootra.
“For years, Japan had interest rates close to zero or even negative. Those low rates made it lucrative to borrow in Japanese yen and invest elsewhere in the world. Japan recently hiked interest rates, causing the yen to strengthen significantly and forcing carry-trade investors to scramble to unwind their positions. The weaker-than-expected U.S. jobs report and geopolitical issues also stoked recession fears, causing a global sell-off in stocks.”
Bhootra notes that stock market volatility is not unusual and can be a time for steadfastness for investors.
“Investors should avoid knee-jerk reactions, take a long-term perspective and stay the course. Savvy investors may even find some opportunities to take advantage of the recent decline in stock prices. It is also a good time to reevaluate risk tolerance. If this market turbulence is causing some investors to panic, perhaps it is time for them to reduce allocation to risky assets like stocks in favor of more conservative investments going forward.”
With markets pricing in a 50 basis point drop in interest rates from the Federal Reserve in September, there’s evidence of changing economic times. Stick with the College of Business and Economics for the latest in-depth yet accessible commentary from thought leadership experts.