August 6, 2024

In any absolute horrible session that continued with the two awful ones to end last week, the market here got spooked by a crash in Japan which swept around the world and resulted in the third horrendous session in a row here as fears worsened about a slowing U.S. economy.

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The Dow collapsed by 1,033 points with every member lower while the S&P crashed by 160 down to 5186 for its worst session in nearly two years. The Nasdaq also ended sharply lower with a 576 point wipeout for its worst three-day session since the 2020 Covid collapse. This took place as the former Magnificent 7 technology leaders all continued to deteriorate from their record highs last month.

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And how about the recently beloved Russell 2000 Index of small stocks which dropped by 70 down to 2039 and this one has now joined the Nasdaq in an official “correction” of more than 10% from its recent high and wasn’t that fast.

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And how about the VIX, which got as high as 66 in the morning, which looked a little phony and then ended at 38.57 as it historically has wanted to do when it gets that high, which is unsustainable over many years.

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The drops were the latest in a global sell-off that began last week. Japan’s Nikkei 225 helped begin Monday by plunging 12.4% for its worst day since the Black Monday crash of 1987.

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It was the first chance for traders in Tokyo to react to Friday’s report showing U.S. employers slowing their hiring last month by much more than economists expected. That was the latest piece of data on the U.S. economy to come in weaker than expected, and it has raised fear the Federal Reserve has pressed the brakes on the U.S. economy by too much for too long through high interest rates in hopes of dealing with inflation.

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Investors cautioned that some technical factors could be amplifying the action in markets, and that the drops may be overdone, but the losses were still astounding as for instance, South Korea’s Kospi index careened 8.8% lower, and bitcoin dropped below $54,000 from more than $61,000 on Friday.

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Even gold, which has a reputation for offering safety during tumultuous times, slipped about 1%.

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Traders began wondering if the damage has been so severe that the Federal Reserve will have to cut interest rates in an emergency meeting, before its next scheduled decision on September 18th, which is six weeks away. The yield on the two-year Treasury, which closely tracks expectations for the Fed, briefly sank below 3.70% during the morning from 3.88% late Friday and from 5% in April. It later recovered and pulled back to 3.89%. At that point, the long inverted yield curve actually went positive as the two-year got down to 3.67% while the 10-year was trading at 3.78%.

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Of course, the U.S. economy is still growing, the U.S. stock market is still up a healthy amount for the year and a recession is far from a certainty. The Fed has been clear about the tightrope it began walking when it started hiking rates sharply in March 2022: Being too aggressive would choke the economy, but going too soft would give inflation more oxygen and hurt everyone.

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Some of the recent declines may simply be air coming out of a stock market that romped to dozens of all-time highs this year, in part on a frenzy around artificial-intelligence technology. Critics have been saying for a while that the stock market looked expensive after prices rose faster than corporate profits.

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The only way for stocks to look less expensive is either for prices to fall or for their profits to strengthen. Expectations are still high for the latter, with growth for &P profits this past quarter looking to be the strongest since 2021.

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Professional investors also pointed to the Bank of Japan’s move last week to raise its main interest rate from nearly zero. Such a move helps boost the value of the Japanese yen, but it could also force traders to scramble out of deals where they borrowed money for virtually no cost in Japan and invested it elsewhere around the world.

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Treasury yields also pared their losses Monday after a report said growth for U.S. services businesses was a touch stronger than expected, to 51.4. Growth was led by arts, entertainment and recreation businesses, along with accommodations and food services, according to the Institute for Supply Management.

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Still, stocks of companies whose profits are most closely tied to the economy’s strength took sharp losses on the fears about a slowdown. The small companies in the Russell 2000 index dropped 3.3%, washing out what had been a revival for it and other beaten-down areas of the market.

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Big Tech’s momentum turned last month on worries investors had taken their prices too high and expectations for future growth were becoming too difficult to meet. A set of underwhelming profit reports that began with updates from TSLA and GOOG added to the pessimism and accelerated the declines.

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Apple fell 4.8% Monday after Warren Buffett’s Berkshire Hathaway disclosed that it had slashed its ownership stake in the iPhone maker.

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The chip company that became the poster child of Wall Street’s AI bonanza, fell even more, 6.4%. Analysts cut their profit forecasts over the weekend for the company after a report from The Information said their new AI chip is delayed. The recent selling has trimmed its gain for the year to nearly 103% from 170% in the middle of June.

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Another Big Tech titan, GOOG, fell 4.4% after a U.S. judge ruled that its search engine has been illegally exploiting its dominance to squash competition and stifle innovation.

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Worries outside corporate profits, interest rates and the economy are also weighing on the market. The Israel-Hamas war may be widening with Iran promising some sort of retaliation for the recent killing of a top terrorist in Teheran recently.

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Earnings this week will see: today – PLTR, LCID, UBER, CSX, FOXA, JJSF, DUK higher; tonight – Dow component AMGN and SMCI.

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Economic reports will have- yesterday – July ISM Services Index came in a little better than expected at 51.4.