Stock prices tumbled on Monday, extending losses from recent trading sessions as fears of a weakening economy gripped markets.
The Nasdaq Composite (^IXIC) fell 4%, while the S&P 500 fell about 3% and the Dow Jones Industrial Average (^DJI) lost more than 2%, or about 1,000 points, in early trading.
The 10-year Treasury (^TNX) yield fell another 10 basis points to around 3.69%, and is now down about 60 basis points in less than two weeks. Volatility has also risen, with the CBOE Volatility Index, known by its ticker simply as the VIX (^VIX), rising above 60 for the first time since 2020.
The latest phase of the sell-off accelerated overnight as Japan’s Nikkei 225 (^N225) fell more than 12% in its biggest daily loss ever after a surprise rate hike from the Bank of Japan. Ed Yardeni, president of Yardeni Research, told Yahoo Finance that he believes the “large extent” of the sell-off in U.S. stocks is attributable to the moves in Japan.
Yardeni explained that the unwinding of the so-called ‘carry trade’ came about because speculators in Japan borrowed money at 0% interest and then invested that money in market segments such as the Magnificent Seven technology stocks.
“Now, with the central bank tightening while other central banks are easing, the yen suddenly made a big move to the upside and that strength really led to a lot of margin calls on these speculative positions,” Yardeni said. “That’s all coming apart. And I think it’s a lot of margin calls, and I think it’s going to happen pretty quickly, and the unwinding should be over by the end of the week.”
The sell-off in US stocks also came as investors revised down their expectations for domestic monetary policy.
A weaker-than-expected July jobs report, which showed a largely accurate recession indicator tied to a rise in the unemployment rate, added to fears that the Fed’s policy was too restrictive.
Markets then quickly moved to price in greater odds of more rate cuts this year. As of Monday morning, markets were pricing in about a 95% chance of a 50 basis point rate cut by the end of the Fed’s September meeting, compared with less than a 12% chance a week earlier, according to the CME FedWatch Tool.
Still, some Wall Street strategists don’t think this move in the markets is a reliable indicator of the ailing US economy.
“I don’t necessarily think the market is voting that the economy is going to suddenly weaken,” Kevin Gordon, senior investment strategist at Charles Schwab, told Yahoo Finance. “I think it’s going to take a little bit longer for us to get a sense of that.”
Gordon notes that since the recent market peaks in July, defensive sectors such as consumer staples and utilities have led the market, while the biggest losses have been recorded in the technology sector.
“The sectoral measures show me that it is much more about selling the high flyers and making some profit. It is not about an outright collapse of the cyclical trade.”
According to Gordon, the recent market reaction to the jobs report was in line with investor sentiment following earnings from big tech companies. In both cases, expectations were likely too optimistic compared to the actual data.
“It’s a good reminder that this is all about expectations and not necessarily good or bad when it comes to data,” Gordon said.
On Monday, big tech companies continued to be the biggest culprits in the sell-off. Nvidia (NVDA) fell nearly 10%, while Apple (AAPL), Meta (META) and Microsoft (MSFT) all fell more than 4%.
