Stock Market Takes a Tumble Amidst Economic Uncertainty
In a dramatic turn of events, the stock market suffered significant losses on Monday, continuing the downward trend observed over the past several trading sessions. The apprehension surrounding a potentially weakening economy has sent shockwaves through the markets.
The Nasdaq Composite plunged approximately 2.5%, while the S&P 500 saw a decline of around 2.2%. The Dow Jones Industrial Average didn’t fare any better, shedding nearly 2%, translating to a drop of almost 800 points in afternoon trading.
Meanwhile, the 10-year Treasury yield hovered near 3.83%, marking a drop of roughly 50 basis points in under two weeks. Volatility surged, with the CBOE Volatility Index, commonly referred to as the VIX , soaring above 60 for the first time since 2020.
The latest leg of this sell-off was triggered by Japan’s Nikkei 225, which experienced its most significant daily loss ever, plummeting over 12% following an unexpected interest rate hike by the Bank of Japan. Ed Yardeni, president of Yardeni Research, pointed to these developments in Japan as a major factor contributing to the sell-off in US stocks.
Yardeni explained that the unwinding of the so-called carry trade has played a pivotal role. Speculators have been borrowing at 0% interest rates in Japan and investing that money into high-flying areas of the market like the Magnificent Seven tech stocks. However, with Japan tightening its monetary policy while other central banks are easing, the yen has strengthened considerably, leading to widespread margin calls on these speculative positions.
“That’s all coming unglued,” Yardeni stated. “And I think it’s a lot of margin calls, and I think it’s going to happen pretty quick, and the unwind should be over by the end of the week.”
In the US, the sell-off also coincides with investors recalibrating their expectations for domestic monetary policy. A weaker-than-expected July jobs report, which revealed a notable rise in the unemployment rate—a key recession indicator—has fueled concerns that the Federal Reserve’s policies might be overly restrictive.
As a result, market expectations for rate cuts have shifted dramatically. According to the CME FedWatch Tool, as of Monday morning, markets are pricing in a roughly 95% chance of a 50-basis-point interest rate cut by the end of the Fed’s September meeting, a stark increase from less than 12% a week earlier.
However, some Wall Street strategists caution against interpreting the market’s moves as a straightforward indication of a faltering US economy. Kevin Gordon, a senior investment strategist at Charles Schwab, expressed skepticism about the notion that the market is signaling an immediate and significant economic downturn.
“I don’t necessarily buy the fact that the market is voting that the economy is just weakening outright overnight,” Gordon told Yahoo Finance. “I think it takes a little bit longer for us to get a sense of that.”
Gordon highlighted that since the market highs in July, defensive sectors like Consumer Staples and Utilities have led the market, while Technology has suffered the most significant losses. This sector action suggests that the recent sell-off is more about investors taking profits from high-flying tech stocks rather than an outright collapse in the cyclical trade.
Echoing this sentiment, Drew Pettit, Citi US equity strategist, noted that the market’s recent behavior continues a trend where investors take profits from the “high flying” tech stocks that led the market rally in 2023 and much of 2024, reallocating to less growth-dependent areas of the market.
“This is kind of what you get when markets have a really aggressive run with not a lot of volatility,” Pettit said. “Everyone kind of gets on very similar trades. Everyone gets pulled up at the same time.”
Despite the turmoil, Pettit believes the fundamental story for stocks to end the year higher than their current levels remains unchanged. He pointed out that the strong sentiment and high growth expectations are now being reassessed, but the overall outlook for the market could still be positive.
On Monday, Big Tech bore the brunt of the sell-off, with Nvidia (NVDA) sliding nearly 7%, and Apple (AAPL), Meta (META), and Microsoft (MSFT) all dropping more than 3%. This underscores the broader trend of investors reevaluating their positions in tech stocks amidst a volatile economic landscape.
