Traders work on the trading floor of the New York Stock Exchange (NYSE) on August 5, 2024.
Spencer Pratt | Getty Images
Any number of suspects could be blamed for Monday’s market decline, from worries about the economy and the Federal Reserve’s seemingly slow response to the loosening of popular global currency trading and worries about corporate earnings.
These all play a role in some form, and each helps tell a story about changes in the investment landscape that may not yet be fully realized.
“This is very much a regime change that is affecting sentiment in a big way,” said Robert Teeter, chief investment strategist at Silvercrest Asset Management. “The market got a little ahead of itself in the previous run up. Now we’re pulling back to April and May levels, this is a sharp pullback because it’s a very big wake-up call.”
This call came in the form of a sell-off, Dow Jones Industrial Average It fell more than 1,200 points in early trading on Monday and briefly sold off. S&P 500 Index That’s down 9% from July’s record.
average market decline
As bond traders bet on economic slowdown and The Fed will be forced to lower interest rates Interest rates are fast.
Concerns about the state of the economy began on Thursday, heightened by disappointing manufacturing and layoff data. On Friday, the Labor Department reported that the situation has worsened Job creation lower than expected July’s numbers and rising unemployment triggered a credible recession signal known as “Sam’s Rule.” Soon, traders began pricing in big interest rate cuts from the Federal Reserve, which had been expected to take no action for the rest of the year.
In fact, with sentiment running high, what policymakers are thinking is not that far off from what investors are thinking. The Fed waited too long to ease policy Benchmark short-term borrowing rates are currently at 23-year highs.
Monday market pricing almost certain The Federal Reserve will cut interest rates by 0.5 percentage points at the September meeting, followed by cumulative interest rate cuts of 1.25 percentage points in November and December.
‘Perfect storm’ sinks market
“It’s a perfect storm of slowing growth, crowded positioning and peak risk aversion at the same time,” said John Belton, portfolio manager at Gabelli Funds. “The market is really going to follow the data now and will be easing in the direction of monetary policy as the background.”
In addition to worries about the economy and monetary policy, markets must contend with the unwinding of a popular trade that involves borrowing against cheap currencies such as the yen and buying high-yielding currencies – the “carry trade” that has helped drive global market development.
The Bank of Japan’s unexpected interest rate hike and currency intervention last week raised concerns about the end of the carry trade. The yen rose sharply on Monday Japanese stocks have had their worst day yet Since Black Monday in October 1987.
Corporate profits have also been questioned.
FactSet data shows that during the second-quarter earnings season, 78% of companies exceeded profit expectations, but only 59% of companies exceeded revenue expectations. Additionally, forecasts from some of Silicon Valley’s most forward-thinking companies have sparked outrage, such as Nvidia It’s down 11% in the past five days, but we’ve paid the price.
Finally, geopolitical concerns remain, with markets worried about events in the Middle East and Ukraine, as well as the rapidly changing political landscape in the United States, where likely Democratic nominee Kamala Harris is nearly neck-and-neck with Republican Donald Trump in many polls .
Given the backdrop of a highly valued market—the S&P 500 was trading at 20.7 times forward earnings last week, about 15% above normal five-year levels—and it has all the makings of a sell-off.
Michael Farr, CEO of Farr, Miller & Washington, said: “This is a confluence of a very high market that has been surging and relies on a lot of mood and sentiment. Momentum trades have been successful trades for months.
“While people feel comfortable making the basic thesis, deep down everyone knows that the stock price is not going to go up 30% in six months,” he added. “So when you’re in a profit-making period, profit-taking is It was easy. It was an easier decision to say I wanted to go home with my chips.”
no time to panic
Still, Farr, like many others on Wall Street, believes now is not the time for the Fed to take any drastic action.
Despite rising unemployment and soft manufacturing conditions, most other economic indicators remain good.
Monday’s service sector data was better than expected, with nearly 8.2 million jobs still open. The Federal Reserve Bank of Atlanta is tracking Although the data is limited, the growth rate in the third quarter was 2.5%.
“Two weeks ago, the economic data was pretty reasonable, the employment data was pretty reasonable,” Farr said. “But over the course of one weekend, we were plunged into a world of doomsday fear, which happens every time.”
No one interviewed on Monday said they thought it was time for investors to make a big change.
Silvercrest’s Teeter said he was simply advising clients to rebalance, while Gabelli’s Belton said he would focus on when the current downward momentum begins to shift.
“I think it’s an opportunity, a huge overreaction, but that’s not to say this might not continue,” Farr said. “Momentum creates momentum both up and down. People say they hate volatility. , that’s a lie. What they hate is downside volatility. No one hates upside volatility.”
