Yesterday’s massive sell-off in global markets, with stock indexes “red” one after the other, came after intense investor concern about an impending recession in the world’s largest economy.

The turmoil spread around the world on Monday, starting overnight in Japan, where the Nikkei plunged more than 12% – its worst performance since the 1987 global market crash – and spreading to Europe and the US, where major stock indexes recorded losses of more than 2%.

Concerns have been fueled since Friday by the latest U.S. jobs data, which showed unemployment rose to 4.3 percent in July, the highest level in nearly three years, and the superpower’s businesses slowing hiring. Just a few weeks ago, economists were optimistic about easing inflation and resilient growth, a combination that could give Vice President Kamala Harris a boost in her candidacy. However, the weakening labor market has fueled fears that the honeymoon will not last.

Why is there concern in the markets?

Markets are forward-looking, so they’re watching economic indicators closely to see where this might lead. Last Friday, the Labor Department reported that the unemployment rate had risen more than expected, signaling a slowing economy and raising fears that the US may not eventually escape recession. One of the things that stocks react to is the future expected earnings of companies and slower growth which means lower earnings.

The sell-off was particularly focused on technology stocks which had driven market indices disproportionately higher.

There are also quirkier contributors to the sale. Japan’s central bank last week raised interest rates and suggested borrowing costs could rise further. The U.S. central bank, by contrast, has signaled it will likely cut interest rates soon as inflation eases, and weak jobs fueled expectations it may cut borrowing costs faster than expected.

Thus, Japan’s currency strengthened greatly against the US dollar. This began to pressure investors such as hedge funds who were borrowing cheaply in yen (debt is now more expensive) and then investing in US assets (those assets are now worth less). This situation therefore led them to try to raise cash, fueling the turmoil in the market.

Are we headed for a recession?

The question is whether after yesterday’s massive sell off we are headed for a recession. No one knows for sure, but this doesn’t look like a recession yet, Politico notes in its analysis, noting that the US economy actually still looks fine. Unemployment is at 4.3%, which is bad, but only if you compare it to 3.4%, where it was at the beginning of 2023.

Also, US GDP grew at a rate of 2.8% in the second quarter of the year, which is faster than expected.

But one thing is clear, the economy is now slowing down. The question is how much it slows down and how quickly this happens.

If the jobless rate stays the same or improves in August, it may allay fears that there is a rapid deterioration in economic conditions. The central bank is already expected to cut interest rates at its next meeting in September, and Fed officials could decide to cut rates by more than the standard quarter of a percentage point at that meeting.

For now, however, they don’t seem to be panicking. Chicago Fed President Austan Goolsbee told CNBC on Monday morning that it doesn’t look like the economy is in a recession.

The impact on the US election

Republicans have taken advantage of this news about the US economy. But markets are volatile, and there will likely be ups and downs in the weeks leading up to the election, making political messaging on Wall Street more difficult.

Most investors though they do not connect the crash with the election campaignalthough political uncertainty is certainly one thing that markets are weighing on.

Meanwhile, GOP pollster Frank Luntz warned about the political power of the stock market.

“I’ve studied economic factors that affect political outcomes for years,” Luntz said in a post on X. “I can say unequivocally that the stock market doesn’t matter — it didn’t help Trump when he was up and it won’t hurt Harris when will decline.”

However, if stocks continue to fall, that will likely coincide with bad news about the economy, which in itself would be a challenge for Harris.