Why Stock Investors Are Suddenly So Scared
While 2023 has seen sizable profits for many investors, recent weeks have witnessed a series of market losses triggered by escalating apprehensions of economic contagion from China’s slowdown, coupled with concerns over inflation, Russia’s activities in Ukraine, and vulnerabilities in the American banking sector. These collective factors have cast a shadow over Wall Street, leading to a wave of uncertainty in the financial landscape.
The Nasdaq experienced a sharp decline of 7.7% in August, with the S&P 500 also tumbling by almost 5% during the same period. Notably, the Dow Jones Industrial Average dropped below its 50-day moving average, a key threshold often interpreted by investors as a bearish sign. The Dow has shed 3% this month.
CNN Business Fear & Greed Index, which assesses seven indicators of market sentiment, is reflecting signs of fear on Friday for the first time since March. This shift is striking, considering that merely a month ago, the index signalled “extreme greed.”
What’s Behind the Downturn?
China’s Economic Woes:
China’s struggling economy presents a foreboding omen for US stocks and investor portfolios. In July, Chinese consumer spending, factory production, and long-term asset investments experienced a slowdown, as reported by the country’s National Bureau of Statistics. The spiralling youth unemployment in the second-largest global economy has further exacerbated concerns. Adding to the turmoil, an ongoing real estate and debt crisis in China has fueled apprehensions of a “Lehman-like” crisis.
US-China Tensions:
Tensions between the US and China have surged, with disputes ranging from trade policies to technology advancements, as well as Russia’s incursion into Ukraine. Over the past two decades, China’s economic growth has played a pivotal role in global economic dynamics. Any slowdown in China’s economy reverberates, inducing a deceleration in global economic growth and affecting US equities. Notably, US companies with significant exposure to the Chinese market, such as Apple, Intel, Ford, and Tesla, face heightened vulnerability.
Federal Reserve’s Actions:
The Federal Reserve has undertaken a series of interest rate hikes, reflecting a combined increase of over 5 percentage points in the past 18 months to combat escalating inflation. While market sentiment initially indicated a belief that rate hikes were nearing their conclusion, robust economic data has challenged this assumption. The US economy’s resilience, with strong GDP growth, low unemployment, and robust consumer spending, has prompted the Federal Reserve to consider further interest rate hikes to tackle inflation.
Geopolitical Unrest:
While global inflation is gradually receding, geopolitical tensions continue to loom. Russia’s Ukraine invasion fuels concerns about amplified food and oil prices worldwide. The instability and uncertainty associated with heightened tensions pose risks to global economic stability.
Banking Sector Vulnerabilities:
Fears of contagion stem from the regional banking crisis earlier this year. Investor Michael Burry’s fund offloaded shares in several banks, including First Republic Bank, Huntington Bank, PacWest, and Western Alliance. Moreover, significant US banks encountered downward pressure following Fitch Ratings’ warning of a potential downgrade of the US banking industry, impacting major American lenders.
The August Doldrums:
Historically, August is characterized by reduced trading volumes and heightened volatility due to a surge in vacations among investors. The well-known adage “sell in May and go away” underscores the volatility of the summer months. The trend holds true for August, which, on average since 1986, has exhibited the weakest stock market performance. This month’s economic data and corporate reports have injected further uncertainty into an already volatile environment, as traders strive to navigate the turbulence.
