Good morning.
After months of worrying about AI bubbles, interest rates, Big Tech, elections, inflation, geopolitics, recession risk, and more, investors saw their fears come to life yesterday as global stock markets plunged. Japan’s benchmark index shrunk 12% in its worst loss since 1987. The Dow was down 2.6%, losing more than 1,000 points, while the Nasdaq dropped 3.5%. The "Magnificent Seven"—Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla—together lost more than $650 billion in market cap.
This is not the kind of drama one seeks during these dog days of summer—or winter, south of the equator. What’s fueling this fear? How deep does it go? And how long will it last?
Did the Bank of Japan, once home to negative interest rates, pull what V. Keshadev at Fortune India called a "Pearl Harbor on Wall Street" by raising rates to 0.25% last week? That boosted the yen and forced an unwinding of the so-called "yen carry trade" arbitrage in which investors borrowed cheap yen at near-zero rates to buy higher-yielding assets elsewhere. (A moment of silence for those who must find new gaps to exploit.)
Did the downturn start with us, here in the U.S.? Investors are worried about AI hype, volatility, a weak July jobs report, recession risk, and whether the Fed is doing enough. Some are drawing comparisons to the Black Monday crash of 1987, in which stocks regained more than half their lost value in two days but took almost two years to fully recover. (Asian markets certainly came roaring back on Tuesday.)
Maybe we did buy into the hype around some stocks—“we” being a rhetorical term as I invest in funds. While the AI revolution is coming, after all, it’s not quite here. Out of curiosity, I asked some chatbots last night why the stock market was crashing. Claude apologized and said its “knowledge cutoff is April 2024.” ChatGPT told me to check “recent financial news.” Meta.ai tried to comfort me, saying the S&P 500 had “its worst July in 10 years, but the index has gained after every period of losses in the past.” (Perhaps that’s why Meta CEO Mark Zuckerberg is rocking chain necklaces and leather jackets these days.)
Google’s Gemini, meanwhile, chastised me for my choice of language, noting that “what we've been experiencing is a significant correction. While it's been a tumultuous period, it's important to distinguish between a correction and a crash… A correction is a temporary decline in the market of 10% to 20%. A crash is a much more severe and rapid drop.”
Wait. So Google’s AI bot says it’s temporary? As the dominant player in sifting through the world’s data, I guess Google ought to know. Then again, regulators seem to feel it knows too much. On Monday, a federal judge ruled that Google is a monopolist that controls too much of the search market. That’s the first major antitrust case against a tech company in more than two decades where the government has won. Much like the stock market, the drama is far from over.
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Diane Brady
diane.brady@fortune.com
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