Stocks took a nosedive on Monday, extending losses from previous trading sessions as concerns about a weakening economy rattled markets. The Nasdaq Composite, S&P 500, and Dow Jones Industrial Average all experienced significant drops, with the Nasdaq falling about 3.4%, the S&P 500 dropping 3%, and the Dow shedding about 2.6%, or over 1,000 points in afternoon trading.
The 10-year Treasury yield also saw a significant decline, hovering near 3.78%, down roughly 50 basis points in less than two weeks. Volatility spiked as well, with the CBOE Volatility Index (VIX) shooting up above 60 for the first time since 2020.
The sell-off gained momentum overnight as Japan’s Nikkei 225 experienced its largest-ever daily loss of more than 12% following a surprise interest rate hike from the Bank of Japan. Yardeni Research president Ed Yardeni attributed a large portion of the sell-off in US stocks to the developments in Japan.
Yardeni explained that the unwinding of the carry trade, where speculators borrowed money in Japan at 0% interest rates and invested in high-risk assets like tech stocks, led to margin calls and a rapid sell-off. He predicted that the unwind would be completed by the end of the week.
The sell-off in US stocks was also influenced by adjustments in expectations for domestic monetary policy. A weaker-than-expected July jobs report triggered fears of a recession, leading to speculation about potential rate cuts by the Federal Reserve. Markets quickly priced in higher chances of rate cuts, with a 95% probability of a 50-basis-point cut by the end of the Fed’s September meeting.
Despite the market turmoil, some Wall Street strategists believe that the sell-off is not solely indicative of a weakening US economy. Charles Schwab senior investment strategist Kevin Gordon noted that defensive sectors like Consumer Staples and Utilities had outperformed while Technology stocks had seen significant losses.
Gordon emphasized that the market reaction was more about managing expectations and taking profits from high-flying tech stocks rather than a collapse in the broader economy. He highlighted the importance of understanding the role of expectations in market movements.
Big Tech companies like Nvidia, Apple, and Microsoft were major contributors to the sell-off on Monday, with their stocks sliding significantly. Citi US equity strategist Drew Pettit echoed Gordon’s sentiments, attributing the market action to a shift away from high-growth tech stocks towards other areas of the market.
Pettit emphasized that the fundamental story for stocks to end the year higher than current levels had not changed, indicating that the sell-off may be a temporary adjustment rather than a long-term trend. Despite the market volatility, he remained optimistic about the potential for stocks to recover and continue their upward trajectory.
In conclusion, the recent sell-off in stocks was driven by a combination of factors including concerns about the global economy, changes in monetary policy expectations, and profit-taking from high-flying tech stocks. While the market experienced significant turbulence, some analysts believe that the underlying fundamentals remain strong and that stocks have the potential to rebound in the near future.