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When Wall Street has a fit like it did on Monday, it’s easy to get caught up in the drama and worry about the state of the world. If the pros are panicking, it must be serious, right?

In this case, not really.

Of course, the bloodbath on Wall Street and on stock markets around the world was real. Prices fell by three percent and the Dow Jones plunged by more than 1,000 points – only the 15th time in the index’s 128-year history.

But Monday’s panic was the Wall Street equivalent of a child throwing a tantrum after being told he can’t have ice cream for dinner.

There are several reasons why the breakout was so dramatic, including the fact that trading volume is low this time of year, when Wall Streeters tend to leave the trading desk and head to the Hamptons for their semi-annual trek. But don’t let the stock market drama fool you: The U.S. economy is still in good shape, despite some turbulence.

“The sky is not falling yet,” CNN analyst Rana Foroohar said on Monday. “And I’m not particularly worried about Wall Street getting impoverished.”

Stock markets appeared to be recovering on Tuesday, starting in Japan, where the Nikkei 225 rose 10% after plunging 12% on Monday. And U.S. stock futures were generally up, albeit modestly, on Tuesday.

Reason 1: The labor market report

The U.S. unemployment rate for July was expected to be steady at 4.1% when the jobs report was released on Friday. Instead, it rose to 4.3%. That’s not great, but it’s also not the kind of bad news that would normally trigger a major sell-off. The increase was largely due to people returning to work, not layoffs.

And as Goldman Sachs analysts noted, it’s only one month.

“We are hesitant to view July’s employment numbers as a new trend,” Goldman’s chief economist Jan Hatzius wrote in a note to clients. “It is usually a mistake to extrapolate too much from an employment report unless there is a major shock that abruptly changes the picture.”

And to shed some light on the unemployment rate, it rises when people re-enter the labor market, and it rises when companies impose temporary layoffs. Both of these things happened last month.

More than 70 percent of the increase in July was due to temporary layoffs, which “could, however, be reversed and are not a good indicator of a recession,” Goldman analysts point out.

There is also debate about whether the market misinterpreted the Bureau of Labor Statistics’ statement that Hurricane Beryl, which hit the U.S. Gulf Coast in late June and early July, “had no discernible impact on national employment and unemployment data for July.”

BLS says Beryl did not affect his ability to collect Data – not that Beryl didn’t have an impact on the unemployment rate, says Aaron Sojourner, a labor market economist at the WE Upjohn Institute for Employment Research.

The BLS reports estimates but does not interpret them, he added.

“A great summary of the BLS comes from this old aphorism: ‘When asked whether the glass is half full or half empty, the BLS answers that there are 4 ounces of liquid in an 8-ounce glass,'” wrote Sojourner, a former member of the White House Council on Economic Advisory.

Bottom line: One month is not a trend, and if you look at the numbers a little further, there are still signs that the labor market is cooling down. But demand remains strong.

Reason 2: Whining about the Fed

Wall Street has had enough of high interest rates and traders have concluded that Federal Reserve bureaucrats should have cut rates at their meeting last week instead of leaving them unchanged.

They may be right, but the Fed’s work is as much an art as a science. The economy is huge and cumbersome, and the central bank has only blunt tools to bring it into a healthy balance.

In some ways, Monday’s tantrum was Wall Street’s attempt to tell the Fed, “Look what you made me do.”

Reason 3: AI is not the game changer everyone was hoping for

Markets were already in a bad mood last week as major technology companies, particularly artificial intelligence darlings like Nvidia and Microsoft, reported largely disappointing earnings.

When ChatGPT launched two years ago, Wall Street went wild. And since then, investors have been showering companies with money in the hope that AI is as revolutionary as its proponents claim. But Wall Street isn’t known for its patience, and aside from improving web search capabilities, AI hasn’t done much to date. (The Spotify DJ feature is pretty cool too, right?)

At some point, AI will have to make money for these companies instead of just costing them money. Google’s surprise defeat in the US antitrust case on Monday is not exactly helpful for the technology industry’s prospects for success.

Reason 4: The Bank of Japan has taken away the free money

In recent years, a popular way for investment firms to borrow money in Japan, where interest rates have been stuck at zero for years, and use it to buy higher-yielding U.S. Treasuries or technology stocks. (This strategy is known as a “carry trade” — and you’ll probably hear that term a lot this week.)

The problem is that the value of the yen has risen in recent weeks, reducing the potential profit from the carry trade.

And when the Bank of Japan raised interest rates last week for the second time in nearly two decades, it prompted investors to unwind their positions – meaning they have to sell stocks to pay back their debts.

And that’s one reason why Japanese stocks fell 12 percent on Monday, their biggest daily loss in nearly four decades.

The unwinding of the yen carry trade accelerated the wave of selling that began in the U.S. last week, said Rob Haworth, director of investment strategy at U.S. Bank.

“We really need to get past the valuation phase of this correction,” Haworth said. “Hopefully sometime this week we can finally get to the fundamentals.”

He added: “And the fundamentals look good.”

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