Financial markets around the world stabilize after recent rout. Here’s what to know

Markets on Wall Street and in Asia are stabilizing Tuesday following a mini-panic caused by an assortment of factors that stretched from late last week through Monday.

The S&P 500 and Nasdaq each rose 1.3% in morning trading and were on track to break a brutal three-day losing streak. The S&P 500 had tumbled more than 6% after several weaker-than-expected reports raised concerns that the Federal Reserve had pumped the brakes too much on the U.S. economy through high interest rates.

The Dow Jones Industrial Average was up 0.7%.

Elsewhere, Japan’s Nikkei 225 jumped 10.2% Tuesday, following its 12.4% sell-off the day before, which was its worst since 1987. Stocks in Tokyo rebounded as the value of the Japanese yen stabilized a bit against the U.S. dollar following several days of sharp gains.

A rate hike last week by the Bank of Japan contributed to the turmoil by upending trades where investors had borrowed Japanese yen at low cost and invested it elsewhere around the world. The resulting exits from those investments may have helped accelerate the declines in global markets.

Starting Thursday, investors grew worried about a slowing U.S. economy. They pointed fingers at the Fed for waiting too long to cut rates and sold shares of technology companies that had ridden a frenzy around artificial intelligence to lofty stock market valuations.

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Calmer voices that claimed the sell-off was a good thing because stock prices had risen too high seemed to prevail Tuesday. Some of Tuesday’s gainers were those same technology companies investors had fled from. Chipmaker Nvidia was up 3.8% Tuesday morning, following a drop of 6.4% on Monday.

For individual investors, experts say it’s not time for rash decisions, but a moment to make sure their investments are properly diversified.

Here’s a look at the reasons for the turbulence in markets:

Inflation and central banks

Starting in 2022, the Fed rapidly raised interest rates to combat a spike in inflation. It’s maintained its key rate at 5.4% for about a year. As part of its inflation fight, the Fed also aimed to cool down a red-hot labor market.

Investors thought the Fed and other central banks were on track, even though inflation remained somewhat above their targets — in the Fed’s case, 2%. The European Central Bank and the Bank of England cut rates once and the Fed signaled it was prepared to start cutting rates in September.

Anxiety over the U.S. economy

Despite some signs of cooling, the U.S. economy kept chugging along even with higher rates, outpacing Europe and Asia. Then came last week’s economic reports.

Weak readings on the job market, manufacturing and construction sparked worries about a U.S. economic slowdown and criticism that the Federal Reserve waited too long to cut rates.

Traders in the U.S. are now betting the Federal Reserve will lower rates by half a percentage point in September instead of the usual quarter point. Some were calling for an emergency rate cut.

Big Tech

A handful of Big Tech stocks drove the market’s double-digit gains into July. But their momentum turned last month on worries investors had taken their prices too high and expectations for their profit gains had grown too difficult to meet -- a notion that gained credence when the group’s latest earnings reports were mostly underwhelming.

Apple fell more than 5% Monday after Warren Buffett’s Berkshire Hathaway disclosed that it had slashed its ownership stake in the iPhone maker. Nvidia lost more than $420 billion in market value Thursday through Monday. Overall, the tech sector of the S&P 500 was the biggest drag on the market Monday.

Japan’s rollercoaster

The Nikkei suffered its worst two-day decline ever, dropping 18.2% on Friday and Monday combined. One catalyst for the outsized move has been an interest rate hike by the Bank of Japan last week.

The BoJ’s rate increase affected what are known as carry trades. That’s when investors borrow money from a country with low interest rates and a relatively weak currency, like Japan, and invest those funds in places that will yield a high return. The higher interest rates caused the Japanese yen to strengthen, likely forcing investors to sell stocks to repay those loans.

Stocks in Tokyo rebounded as the value of the Japanese yen stabilized against the U.S. dollar.

What should investors do?

The prevailing wisdom is: Hold steady.

Experts and analysts encourage taking a long view, especially for investors concerned about retirement savings,.

“More often than not, panic selling on a red day is generally a great way to lose more money than you save,” said Jacob Channel, senior economist for LendingTree, who reminds investors that markets have recovered from worse sell-offs than the current one.

Bitcoin claws back some losses

Bitcoin was back up to $56,490 Monday morning after the price of the world’s largest cryptocurrency fell to just above $54,000 during Monday’s rout. That’s still down from nearly $68,000 one week ago, per data from CoinMarketCap.

While bitcoin did serve as a safe haven of sorts during the worst of the pandemic, it mostly acts like any another risky asset that investors steer clear from during market downturns.

Sell-offs are normal

Greg McBride, financial analyst for Bankrate, points out that a 10% pullback in markets happens on average once every 12 months.

Quincy Krosby, chief global strategist for LPL Financial, says investors should try to wait out the current wave of turbulence.

“Pockets of volatility are expected to continue as August and September give way to a calmer seasonal period; however, it’s important to remember pockets of opportunity are always on the other side of the storm,” she said.

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Cora Lewis and Wyatte Grantham-Philips in New York contributed to this report.