A renewed bout of volatility hit markets across the board as concerns about a slowdown in the world’s largest economy spurred warnings that this year’s sizzling stock rally has gone too far.
From New York to London and Tokyo, equities got pummeled. Just as markets were starting to celebrate signals from the Federal Reserve about a first rate cut, they were hit by a perfect storm — surprisingly weak economic data, underwhelming corporate earnings, stretched positioning and poor seasonal trends. While the S&P 500 pared some of its losses, it was on track for the biggest drop in almost two years. Trading volume was 65% above the past month average. The tech-heavy Nasdaq 100 headed to its worst start to a month since 2008. Wall Street’s “fear gauge” - the VIX - at one point registered its biggest spike in data going back to 1990.
A rally in Treasuries lost steam after two-year yields — which are sensitive to monetary policy — dropped below that of the 10-year bond for the first time in two years. Bond traders are betting the economy is on the verge of deteriorating so quickly the Fed would need to start easing policy aggressively. The repricing was so sharp that the swap market earlier assigned a 60% chance of an emergency rate reduction by the Fed over the coming week. Those odds subsequently ebbed.
“The economy is not in crisis, at least not yet,” said Callie Cox at Ritholtz Wealth Management. “But it’s fair to say we’re in the danger zone. The Fed is in danger of losing the plot here if they don’t better acknowledge cracks in the job market. Nothing is broken yet, but it’s breaking and the Fed risks slipping behind the curve.”
Treasury 10-year yields were little changed at 3.78%. The dollar fell as the prospect of Fed easing dimmed its appeal. A gauge of perceived risk in the US corporate credit markets saw its biggest-one day spike since March 2023, after Silicon Valley Bank collapsed. The turmoil effectively shut down US company bond sales on what had been expected to be among the busiest days of the year. Cryptocurrencies reeled from a bout of risk aversion, sending Bitcoin down over 8%.
The wave of selling hit a fever pitch in Japan as traders rushed to unwind popular carry trades, powering a 2% jump in the yen and causing the Topix stock index to shed 12% and close the day with the biggest three-day drop in data stretching back to 1959. The rout wiped out $15 billion of SoftBank Group Corp.’s value on Monday.
“It’s complicated: return of the ‘R’ word derailing the Goldilocks trade,” said Maxwell Grinacoff at UBS Investment Bank. “Similar to what we witnessed amidst the small-cap rotation a few weeks ago, the degree of moves was clearly exacerbated by stretched positioning. The difference today is there is fundamental backing to elevated levels of risk premia, from both a macro and earnings perspective.”
Bill Gross, the one-time bond king, said in a post on X that he isn’t “buying the small recovery from morning bottoms” and is not selling either. Markets are “too volatile with bid/ask spreads extremely wide,” he said. Gross added there is “too much leverage” in the global financial system with the strength of the Japanese yen and “overdone treasury yield declines” key to the unwind.
The US stock plunge is vindicating some of Wall Street’s most prominent bears, who are doubling down with warnings about risks from an economic slowdown.
JPMorgan Chase & Co.’s Mislav Matejka — whose team is among the last-standing high-profile pessimistic voices this year — said stocks are set to stay under pressure from weaker business activity, a drop in bond yields and a deteriorating earnings outlook. Morgan Stanley’s Michael Wilson warned of “unfavorable” risk-reward.
“This doesn’t look like a ‘recovery’ backdrop that was hoped for,” Matejka wrote. “We stay cautious on equities, expecting the phase of ‘bad is bad’ to arrive,” he added.
Longtime market and economy watcher Ed Yardeni said that the current global equities selloff bears some similarity to the 1987 crash, when the economy averted a downturn despite investor fears at the time.
“This is very reminiscent, so far, of 1987,” Yardeni said on Bloomberg Television’s Bloomberg Surveillance. “We had a crash in the stock market — that basically all occurred in one day — and the implication was that we were in, or about to fall into, recession. And that didn’t happen at all. It had really more to do with the internals of the market.”
To Seema Shah at Principal Asset Management, economic weakness concerns will likely prove overdone, but the depth of the negative narrative now implies that an imminent market turnaround is unlikely. A sustained market recovery needs a catalyst, or likely a combination of catalysts, including stabilization of the Japanese yen, strong earnings numbers, and solid data releases.
“We doubt the AI-fuelled rally in global equities has burst, despite a rout in the stock market in the US after some disappointing data there last week and a plunge in Asian indices today,” said John Higgins at Capital Economics. “It feels less like 2000 – when the dotcom bubble popped – than 1998 – when a temporary pullback in share prices coincided, like now, with a resurgent yen.”
Investors should hedge their risk exposure even if they own high quality assets as US stocks extend losses, according to Goldman Sachs Group Inc.’s Tony Pasquariello.
“There are times to go for the gas, and there are times to go for the brake — I’m inclined to ratchet down exposures and roll strikes,” Pasquariello wrote in a note to clients. He added that it’s difficult to think that August will be one of those months where investors should carry a significant portfolio risk.
To Michael Gapen at Bank of America Corp., markets are getting ahead of the Fed again.
“Incoming data have raised concerns that the US economy has hit an ‘air pocket.’ A rate cut in September is now a virtual lock, but we do not think the economy needs aggressive, recession-sized cuts.”
Equity markets experienced one of the most severe rotations in years in July, with small cap and value stocks surging and mega cap tech stocks selling off. A key question for investors is whether this move continues or fades out similar to previous rotations, according to Jeff Schulze at ClearBridge Investments.
“While a growth scare could spark a retracement of this rotation, we ultimately expect a pickup in economic growth which should favor small cap, value and cyclicals,” he said. “Leadership rarely moves in a straight line, and we believe the near term (the next several months) could see an oscillation that favors the previous leadership on the perception of safety if the economy cools further. Ultimately, we believe a soft landing will play out.”
As the selloff in global stocks intensified Monday, JPMorgan Chase & Co.’s trading desk said the rotation out of the technology sector might be “mostly done” and the market is “getting close” to a tactical opportunity to buy the dip.
Buying of stocks by retail investors has slowed quickly, positioning by trend-following commodity trading advisers has fallen a lot across equity regions and hedge funds have been net sellers of US stocks, JPMorgan’s positioning intelligence team wrote in a Monday note to clients.
“Overall, we think we’re getting close to a tactical opportunity to buy-the-dip and our Tactical Positioning Monitor could dip further in the next few days,” wrote John Schlegel, JPMorgan’s head of positioning intelligence. “That said, whether we get a strong bounce or not could depend on future macro data.”
Some of the main moves in markets:
Relationships are key to our business but advisors are often slow to engage in specific activities designed to foster them.
Whichever path you go down, act now while you're still in control.
Pro-bitcoin professionals, however, say the cryptocurrency has ushered in change.
“LPL has evolved significantly over the last decade and still wants to scale up,” says one industry executive.
Survey findings from the Nationwide Retirement Institute offers pearls of planning wisdom from 60- to 65-year-olds, as well as insights into concerns.
Streamline your outreach with Aidentified's AI-driven solutions
This season’s market volatility: Positioning for rate relief, income growth and the AI rebound
