Markets Roller Coaster Start of the Week

• Monday: Markets crash, Japan drops 12%

• Tuesday: Stocks rebound with positive news from Japan, U.S.

Japan's stock market recorded its steepest decline in nearly four decades, plummeting 12%^[1] and erasing all gains for the year. Concurrently, the U.S. witnessed a historic surge in the VIX, also known as the “fear” index, which made one of its biggest intraday jumps ever.

This market turbulence followed unexpectedly poor jobs data released on Friday, which drastically altered the economic outlook from a potential mild recession ("soft landing") to a more severe downturn ("hard landing").

The primary concern fueling the global market downturn was the fear of a U.S. recession, triggered by the disappointing July jobs report. Investors were also worried that the Federal Reserve was falling behind in its response to the slowing economy, choosing to maintain interest rates at their highest level in two decades instead of cutting them. Additional market pressures included diminishing excitement around artificial intelligence and a rate increase by the Bank of Japan intended to strengthen the yen.

Further exacerbating market woes was the news that Warren Buffett’s Berkshire Hathaway had sold half of its Apple shares, significantly increasing its cash reserves. Apple's stock value took a significant hit, dropping 4.8% following the announcement.

On Monday, the tech sector bore the brunt of the sell-off, with significant losses in major companies like Nvidia, which lost 6%, while Apple and Microsoft were down over 3%. Both the Nasdaq and SP 500 indices fell by over 2%.

However, a notable recovery occurred on Tuesday. The Bank of Japan introduced a dovish policy stance that sent positive ripples through the markets. Encouraging economic data from the U.S. services sector, which showed a resurgence in new orders and employment, helped markets reverse course. The Nikkei 225 surged 10.2%, marking it as the second-largest single-day increase in three decades. U.S. indices also recovered ground, with key tech stocks like Nvidia and Meta seeing jumps of close to 4%.

Despite the earlier downturn, Nvidia's stock price has doubled this year, indicating a stabilization in market conditions. The SP 500 is now up 9.5% for the year.

The market has swiftly adjusted its expectations, now pricing in a higher likelihood of Federal Reserve rate cuts, with a 65% probability of a 50 basis point cut at the September meeting and anticipating about 1% in total rate cuts in 2024.^[2]

Volatility, though often uncomfortable, is a normal and sometimes healthy part of the financial markets. Historical trends show that the stock market typically undergoes three 5% dips and one 10% correction each year.

All in all, big market swings are normal and part of the game.

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1. Tradingview

2. CME FedWatch Tool