4 Reasons Why the Stock Market Is Falling—and What Experts Say You Should Do

A Financial Analyst on the Stock Market Crash and How It’s Affecting Your 401K

Fast and sudden decline in world stock markets raises concerns among ordinary investors about the impact on their portfolios and 401(k) plans.

The S&P 500 fell 160 points, or 3%, to 5,186 on Monday, the index’s biggest one-day decline in nearly two years, according to FactSet. The tech-heavy Nasdaq Composite fell 3.4% as investors fled some of the tech giants that until recently powered the U.S. market, with Apple losing 4.8% and Nvidia falling 6.4%.

Interestingly, the decline comes after a year of bullish activity in which the stock market hit record highs, bolstering the retirement accounts of millions of U.S. workers. The contraction may leave some 401(k) savers wondering what’s behind the reversal, especially after the U.S. economy appeared to be on solid footing, with steady growth and inflation cooling thanks to a wave of interest-rate hikes by the Federal Reserve.

Here are four reasons experts say the stock market is in crisis, and their advice on what investors should do next.

The Fed may have waited too long to cut interest rates.

A series of signals in recent months suggest the economy is losing momentum, prompting some experts to call on the Federal Reserve to cut its benchmark interest rate for the first time since 2020. For now, though, the central bank has left rates unchanged, including more on its political meeting last week.

Investors worry that the Federal Reserve waited too long to lower borrowing costs for consumers and businesses, increasing the risk of a recession.

“The real concern is that investors are concerned that the Fed is lagging on lowering interest rates, and that means there’s a greater risk of policy error,” Amanda Agati, chief investment officer at PNC’s asset management group, told CBS MoneyWatch. “We’re concerned that we could end up in a recession, as opposed to the earlier expectation of a soft landing.”

Economic data shows slowdown in the US

Stock prices have surged to record highs this year, fueled by expectations that the Federal Reserve will soon cut interest rates for the first time since 2020 as well as the ongoing artificial intelligence boom.

However, market sentiment began to change in mid-July as more economic signals pointed to a slowdown in growth. Those concerns intensified on August 2nd after data showed declines in manufacturing and construction, and a weaker-than-expected jobs report added to Wall Street’s concerns about the economy losing momentum.

Potentially more worrying is that consumer spending — which accounts for about two-thirds of economic activity — is showing signs of weakness, with companies like McDonald’s and Walmart reporting that their customers they cut amid the burdens of still-high inflation and high borrowing costs.

Some experts, however, warn that such data may turn out to be a passing fad rather than a trend.

“Without stating the obvious, one month doesn’t make a trend, so next month’s employment report will be very important,” Seema Shah, global chief strategist at Principal Asset Management, said in an email. “It’s worth noting that the April 2024 payroll number was initially 165,000, then revised down to 108,000, before rising to 216,000 the following month.”

Tech stocks fall victim to high expectations

Some of the stocks hit hardest by the sell-off can be found in the technology sector, with the so-called Magnificent Seven, a group of tech stocks that includes Amazon, Apple and Nvidia, among the market’s worst performers on Monday. Nvidia, the chipmaker whose technology drives artificial intelligencehas lost 23% of its value since July 31.

Before last week, these stocks were among the best performers of the year, meaning Wall Street had high expectations for revenue and profit growth. And while the earnings reports have been solid this year, they haven’t impressed investors.

“Even if earnings are in line with expectations, valuation multiples are so high that they’re hard to sustain” those prices, PNC’s Agati said. “Investors are panicking, and that’s a really quick change in sentiment.”

She added: “We don’t believe the fundamentals justify this change. For the most part, Magnificent Seven has performed well in terms of financial performance.”

Interest rate hike in Japan

Professional investors also noted the impact of the Bank of Japan’s decision last week to raise its key interest rate from near zero.

That boosted the value of the Japanese yen. But it also forced traders to unwind investments they had borrowed money in Japan at near-zero interest rates and then converted the yen into dollars, which they then used to buy U.S. stocks. In other words, traders had to sell assets to cover their trades, which could have contributed to the stock market declines, experts said.

“This carry trade has been developing for several weeks and could reach its peak on Friday,” Yardeni Research said.

What should investors do?

First, it’s important to understand that stock declines—even sharp declines—are common. Although the S&P 500 is down about 8% since its July peak, stock price declines of 5% or more have occurred at least once a year for the past four decades, according to Oxford Economics. Market corrections, or declines of at least 10% from their peaks, occur on average every 18 to 2 years, the firm said in a report.

But even bear markets, where stocks fall at least 20% from their peak, are normal and not a reason to panic, experts say. While the temptation to sell can be strong, it’s best to resist that temptation, especially if you’re saving for the long term, such as retirement. Timing the market, or trying to buy and sell stocks to make a profit and avoid a loss, is notoriously difficult and can lead to missed opportunities, research from Charles Schwab has shown.

“If you’re a long-term investor, take a deep breath — it’s very scary, I understand that,” CBS News business analyst Jill Schlesinger told the station. “As long as you’re in a long-term portfolio, you shouldn’t worry.”

Moving to cash “is never a good investment,” PNC’s Agati added. That’s especially true when the Fed is widely expected to cut interest rates as early as September, which would lower returns on savings accounts and money-market funds.

“If you’re concerned about your retirement plan, I wouldn’t break away from it and go into cash,” Agati added, noting that he would consider investment-grade fixed-income investments or U.S. Treasuries because they could provide more attractive future returns.