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 more than 1,000 points in afternoon trading.
One of the key indicators of market sentiment, the 10-year Treasury yield, was hovering around 3.78%, down approximately 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 following Japan’s Nikkei 225 experiencing its largest-ever daily loss of over 12% after a surprise interest rate hike by the Bank of Japan. Ed Yardeni, president of Yardeni Research, attributed a significant portion of the sell-off in US stocks to the developments in Japan. He explained that the unwinding of the carry trade, where speculators borrowed money in Japan at 0% interest rates to invest in high-growth areas like tech stocks, led to margin calls and a rapid unraveling of speculative positions.
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, prompting markets to price in higher chances of additional rate cuts by the Federal Reserve. As of Monday morning, markets were pricing in a 95% chance of a 50-basis-point interest rate cut by the end of the Fed’s September meeting.
Despite the market turmoil, some Wall Street strategists believe that the recent 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 losses were concentrated in the Technology sector. He emphasized that the market reaction was more about managing expectations and profit-taking rather than a broad economic downturn.
Big Tech stocks continued to be a focal point of the sell-off, with companies like Nvidia, Apple, and Microsoft experiencing significant declines. Citi US equity strategist Drew Pettit echoed Gordon’s sentiments, attributing the market action to investors rotating out of high-growth tech stocks and into other areas of the market.
While the market volatility may be unsettling, Pettit maintained that the fundamental story for stocks to end the year higher than current levels remains intact. Despite the uncertainties and fluctuations in the market, investors are advised to stay informed and monitor developments closely to make well-informed decisions.