3 Factors Align to Cause Crash-Like Market Action
This combination of selling is driving markets around the world lower.
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Markets around the world are down sharply on Monday morning as three factors combine to create pockets of panic.
The chaos started Friday morning when news of weaker-than-expected July jobs sparked sudden concern that the U.S. economy was facing a recession and the Fed had made a policy mistake by not already cutting interest rates. Expectations of a half-point cut at the next meeting in September exploded, and now speculation about an inter-meeting cut is starting to build. Bonds are trading sharply higher as interest rates drop due to economic fears.
This sudden shift in the U.S. has had a profound impact on Japan as well. Japan was already struggling with suddenly higher interest rates and a strong yen. For many years, there has been a huge "carry trade" that has taken advantage of low interest rates in Japan to borrow funds and invest them in higher-yielding investments in the U.S. The trade worked as long as the yen was steady, and rates in Japan remained nearly zero, as they had been for decades.
Like most trades of this sort, the yen carry trade was viewed as low-risk, but when interest rates rose, and the yen weakened, it started to blow up, and that was made worse by the sudden recession fears in the U.S. and lower U.S. interest rates.
The market in Japan fell 12.4% overnight compared to 14.9% on Black Monday in 1987. Japan is now in a bear market and is hurting Asian markets, especially Korea.
A third factor that is coming into play is that Warren Buffett’s Berkshire Hathaway BRK.A BRK.B cut his huge stake in Apple AAPL by about 50%. Buffett was a major seller in June and has raised $75 billion in cash and now holds over $275 billion, which is equal to around 25% of the total market cap of the company.
I’ve noted many times recently that Apple had an aggressive valuation with a trailing P/E over 30 and single-digit EPS growth, but the stock was viewed as a "safe-haven" because of its consistent relative strength. Analysts have been consistently raising their price targets for the stock because of its AI focus, but they have not raised earnings estimates significantly. It is an expensive stock, and Buffett is forcing the market to address the issue.
Nvidia NVDA is also under pressure due to news that it is delaying production of its highly touted Blackwell chip.
Bitcoin, Ethereum, and other cryptocurrencies are suffering some of the biggest percentage losses in markets around the world as speculative interest is collapsing and investors decide that maybe the group really isn’t a safe place to hide.
The good news is that much of the market is not terribly overvalued. The Magnificent Seven names had become rather euphoric, but with interest rates falling fast, there are many stocks that have attractive valuations.
The big problem Monday morning is that a combination of index selling, panic selling, and margin selling is occurring, which is driving down everything. There is no way to know how long this will continue, but there eventually will be some great values.
Watch for whipsaw action. When stocks collapse like they are doing Monday morning they eventually will see some huge bounces. The biggest losses are always followed by the biggest gains.
At the time of publication, Rev Shark was long NVDA.
