Stocks fell sharply on Monday, following losses in the past few sessions, as concerns about an economic slowdown dominated the market.
The Nasdaq Composite Index (^IXIC) fell about 3.4%, the S&P 500 index fell 3%, and the Dow Jones Industrial Average (^DJI) fell about 2.6%, or more than 1,000 points, in afternoon trading.
The 10-year Treasury yield (^TNX) hovered around 3.78%, down about 50 basis points in less than two weeks. Volatility has also skyrocketed, with the CBOE Volatility Index, known simply by the ticker VIX (^VIX), rising above 60 for the first time since 2020.
The recent decline accelerated overnight as Japan’s Nikkei Stock Average (^N225) fell more than 12%, its biggest single-day loss ever, following the Bank of Japan’s surprise interest rate hike. Ed Yardeni, president of Yardeni Research, told Yahoo Finance that he believes Japan is responsible for a “large portion” of the drop in U.S. stocks.
Yardeni explained that the so-called unwinding of carry trades arose from speculators borrowing at 0% interest in Japan and taking the funds to invest in areas of the market such as the Magnificent Seven’s tech stocks.
“The central bank tightening while other central banks were easing, suddenly caused the yen to appreciate significantly, and that appreciation actually triggered margin calls on these speculative positions,” Yardeni said. . “Everything is unfolding as it unfolds. And I think there will be a lot of margin calls, but that will happen fairly quickly. By the end of the week, the unwinding will be over.”
Investors also adjusted their expectations for domestic monetary policy, which also contributed to the decline in US stocks.
A weaker-than-expected July jobs report showed that recession indicators were broadly accurate as the unemployment rate rose, raising concerns that the Fed’s policy was too restrictive. Ta.
After that, the market rapidly shifted to factoring in the increasing possibility of further interest rate cuts within this year. As of Monday morning, markets priced in a roughly 95% chance of a 50 basis point rate cut by the end of the Fed’s September meeting, down from a 12% chance a week ago, according to the CME FedWatch tool. It has been rising since. .
Still, some Wall Street strategists believe the market move is not a sure bet against a struggling U.S. economy.
Kevin Gordon, senior investment strategist at Charles Schwab & Co., told Yahoo Finance, “We don’t necessarily buy into the fact that the market is voting that the economy is just going to weaken completely overnight.” Ta. “I think it’s going to take a little bit more time to figure that out.”
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Gordon noted that while defensive sectors such as consumer staples and utilities have driven the market since the recent market high in July, the biggest losses have been seen in the technology sector.
“Sector movements tell us that it is much more important to sell high flyers and make a profit…rather than a complete collapse of cyclical trading.”
Gordon said the recent market reaction to the jobs report is consistent with investor sentiment following the earnings results of big tech companies. In both cases, expectations may have been too comfortable compared to the actual data.
“This is really a reminder that it’s all about expectations and not necessarily good or bad when it comes to data,” Gordon said.
Big Tech continued to be the main driver of declines on Monday, with Nvidia (NVDA) down more than 6% and Apple (AAPL) and Microsoft (MSFT) both down more than 3%.
Drew Pettit, U.S. equity strategist at Citi, echoed Gordon’s sentiments, saying the market action was a sign that investors were profiting from the “high-priced” tech stocks that led the market rally for most of 2023 and 2024. This is a continuation of the recent trend of investing in other areas. Markets that are less dependent on growth.
“This is what you get when the market is not as volatile and is developing very aggressively,” Pettit said. “Everyone is doing very similar work. Everyone is pulled up at the same time.”
He added: “We’re just working in a situation where sentiment was very strong and growth expectations were very high, and now we’re questioning that.”
For Pettit, the basic story remains the same, with stocks ending the year higher than current levels.
Stocks fell sharply on Monday on Wall Street’s concerns about the health of the U.S. economy and the Bank of Japan’s surprise interest rate hike. (Reuters/Shannon Stapleton/File photo) · Reuters/Reuters
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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