Financial markets are supposed to capture the wisdom of the crowd, but on Monday the crowd ran in all directions waving its hands in the air screaming. Japan’s stock market fell the most in 37 years with a 12% plunge that wiped out all its gains for the year, while in the U.S. the VIX index of implied stock volatility briefly had its biggest rise ever. Panic hit.

The selloff was triggered by Friday’s jobs data prompting a sudden switch in the economic narrative from soft landing to hard landing. Add to the mix a period of deflating hype about artificial intelligence and a Bank of Japan rate rise designed to strengthen the yen. News that Warren Buffett’s Berkshire Hathaway had sold half its Apple shares and boosted its cash pile added to the pain.

But the triggers couldn’t possibly justify the scale of the moves. When a new trigger arrived, in the form of better-than-expected data on the service sector, markets partially rebounded and the Vix fell sharply — again, far more than the data could justify.

The selloff—which at one point had chip maker Nvidia down 15%—was so big because investors had been all-in betting that things would work out well. Now things have calmed a bit, the question is whether the unwind of these bets, and the leverage behind them, is done. If it resumes, will the selloff feed back into higher savings and a weaker economy or, worse, hit the financial system?

The extreme examples of past effects from big market falls are 1987’s crash, 1998’s Long-Term Capital Management blowup and 2008’s global financial crisis. History is never perfect, but so far this looks more like a (much milder) version of 1987 than it does the other two.

In 1987, the stock market had its biggest one-day fall ever, with the S&P 500 down more than 20% on Black Monday in October. Investors had built up excessive leverage after a stunning 39% gain in the year to August’s high, and the crash led both to big margin calls and to badly designed automated trading that exacerbated the selling. But the Federal Reserve poured liquidity into the banks, brokers didn’t default and the market made back all its losses within two years. The economy was fine.

The good news was that 1987 was all about markets: They went up, they went back down, no one else was hurt. The S&P made 36% in the eight months to its August 1987 peak, similar to the 33% it rose in the eight months to the end of June this year. As in 1987, this year’s gains came in spite of tight monetary policy and higher bond yields. Just like today, in 1987 investors were on edge and ready to sell to lock in the unexpected profit. The losses are smaller so far, but lucrative trades have reversed , just as they did for the market as a whole in 1987.

In 1998, the situation was much worse, although stocks recovered more quickly. Highly levered hedge fund LTCM was crushed when Russia’s domestic debt default created a flight to safety. LTCM was big enough that it threatened to bring down Wall Street institutions. The Fed cut rates three times and pulled together a group of banks to rescue the firm and wind down its trades slowly. Stocks took just four months to recover, but the easy money helped stoke the dotcom bubble, which popped two years later and led to a mild recession—and gigantic losses for investors in tech stocks.

We don’t know yet if any hedge funds have been taken out by the big moves in markets, which have brought heavy losses for those engaged in the “ carry trade ” of borrowing cheaply in yen and buying higher-yielding currencies such as the Mexican peso or dollar. Large swings in Treasurys on Monday might also have hurt, given the large positions hedge funds hold. Traders are betting that the Fed will slash rates, with a super-sized cut of 0.5 percentage points priced into futures for the September meeting (and far more earlier in the day).

The really bad outcome would be a repeat of 2008, but it seems highly unlikely. True, some large U.S. banks failed last year, due to bad bets on government bonds. But banks are much less leveraged than they were, and the system is less exposed to a liquidity crisis, as private lenders have taken on much of the risk that used to sit in banks. Big losses are entirely possible, and private funds could hit trouble, but that would take time and wouldn’t create the same system-wide crisis.

The ideal would be that excess in the stock market unwinds as in 1987 without creating wider trouble, hopefully more gradually than in 1987. AI enthusiasm could deflate stock prices much more—even after falling 30% from its June high, Nvidia has still doubled in price this year. But the market is already much closer to normal, with Monday’s falls leaving the Nasdaq 100 index up only 6% this year, and the S&P 7%.

If panic continues to abate, the Fed cuts and nothing breaks in the financial system, we should count ourselves lucky. But it would be good if investors could remember the sinking feeling they had on Monday morning, and try to be a bit wiser and less speculative.

The red numbers in your 401(k) today might appear to vindicate warnings about an artificial-intelligence bubble and infirm economy. But don’t tilt your portfolio toward full pessimism just yet.

The S&P 500 was down 3% Monday, with the Nasdaq falling even further. Investors have been selling the year’s best performers, concerned that disappointing second-quarter results from big technology companies such as Alphabet , Tesla and Intel are a sign that the AI frenzy is a fad. Also, consumer discretionary stocks have become the worst-performing sector in the S&P 500, as lacklustre labour-market reports have raised worries that the Federal Reserve made a mistake by waiting until September to cut interest rates.

Overseas, the Stoxx Europe 600 closed almost 5% below where it was a week ago, whereas the Swiss franc, a common haven asset, is up roughly 4%. The most eye-popping moves happened in Asia, though, where the Nikkei 225 plunged 12.4% Monday in the worst trading session since Oct. 20, 1987—the day that followed Wall Street’s infamous Black Monday.

Yet it is precisely the breakneck speed with which Japanese equities tumbled that should give most investors a reason to remain calm.

As a guideline, sudden market selloffs are less dangerous than those that unfold progressively over time. This is because investors who rationally price in bad economic data often do so slowly, as it trickles in. Flash crashes, conversely, are often a sign that some tidbit of bad news made speculative bets go awry, triggering a cascade of trades, many of them automated.

Japan is particularly prone to such reversals because interest rates there are so low that many investors use them to fund higher-yielding investments in other currencies. Whenever markets get jittery, these “carry trades” tend to unravel, pushing up the yen and hitting Japanese stocks, many of which are diversified exporters that do better when global growth accelerates. Amplifying this tendency, Japanese stocks had this year become extremely popular among global investors.

The timing of the rout also points a finger at the Bank of Japan , which last week decided to tighten monetary policy for the first time in 17 years with the explicit goal of boosting the yen. Investors who rushed to cover their bets then triggered the reversal of stretched trades elsewhere, including in the U.S.

One of the most striking features of the S&P 500 for most of this year has been its extremely low volatility. Until July, the Cboe Volatility Index, or VIX, was at 2019 levels, and kept sliding lower even as investors made big changes to their monetary-policy forecasts.

While the VIX is often dubbed Wall Street’s “fear gauge,” the options contracts it is based on often themselves influence volatility. Whenever investors make bets against market swings, as they have recently in the U.S. by buying lots of structured products , the banks that sell those options are forced to take the other side. These hedges then suppress volatility in the stock market.

The flip side is that whenever a panic breaks through this feedback loop, volatility skyrockets. As the stock market opened Monday, the VIX hovered above 50, making it the highest weekly jump since the onset of the pandemic, though it later fell below 40.

This suggests the selloff is disproportionate, especially looking at the historical record: 87% of the time, investors who bought the S&P 500 on days when the VIX closed at 30 or higher ended up making money a year later.

The second-quarter reporting season has brought mostly good news, with 78% of the S&P 500 firms that have reported so far beating analysts’ earnings estimates—compared with a 74% 10-year average. Both AI-related companies and the rest are reporting net income above what was forecast a month ago. Overall, the U.S. economy still looks robust: The unemployment rate has gone up because the labor force has expanded.

Also, looking at S&P 500 returns since 1994 shows that selling based on the previous day’s falls is a bad strategy. Electing to move into cash after large monthly declines fared better, but still less well than sitting tight.

This isn’t to say that concerns about an economic slowdown or high tech valuations aren’t warranted. Investors have reasons to diversify away from the AI trend or swap more cyclically exposed stocks for more “defensive” names. Indeed, selling out of stocks after particularly exuberant days and months has historically tended to be a winning move. But hindsight is a terrible guide to investing your savings.

Inflation unexpectedly heated up in the eurozone this month, presenting a fresh challenge to policymakers looking for signs that eurozone price rises are easing sustainably.

Consumer prices were 2.6% higher on year in July, picking up pace from in June, according to EU figures released Wednesday. That defied economists’ expectations for a slight decrease in inflation over the month, and leaves the rate further from the European Central Bank’s elusive 2% target. Inflation heated up over the month in Germany, France and Italy, the eurozone’s three largest economies.

Core inflation, which strips out the often volatile effects of food and energy prices, meanwhile stayed stable, against expectations for a slight decrease. But services, a key focus for policymakers at the European Central Bank, did fall slightly.

That decline makes a cut to interest rates the most likely outcome in September, said Franziska Palmas, an economist at Capital Economics.

Still, the higher headline rate may give pause to the central bank as it mulls its next steps on the direction of interest rates in the 20-member eurozone.

The ECB cut interest rates in the currency union for the first time in five years last month, but has refused to be drawn on when and how quickly it will continue to lower rates from their current heights. Markets still expect a second cut to rates at the bank’s next policy meeting in September, but with less certainty than earlier in the summer.

“Until services inflation falls more significantly, the ECB is likely to continue to ease policy only slowly,” Palmas said.