9 factors that explain everything behind recent equities’ dramatic fall.
The global stock sell-off in August 2024 has been driven by a combination of factors, creating a volatile market environment across multiple regions. Markets experts provide many explanations including the health of the US economy, stretched valuations, AI revenues quantification and timeline, corporate earnings strength, global markets ripple effects, etc. In this article, we will try to explore and understand these factors in detail.
1) U.S. Economic Concerns and Signs of Slowing Growth in Europe and China: In the U.S., weaker-than-expected jobs data for July heightened fears of an impending recession. The non-farm payrolls data showed that 114,000 jobs were added in July, significantly below the consensus expectation of 175,000. Additionally, the unemployment rate rose to 4.3%. Investors had been optimistic about a “Goldilocks” scenario—moderate growth with low inflation—but this narrative has been challenged by signs of slowing consumer spending and high borrowing costs. The Federal Reserve’s decision to maintain high interest rates also added to market anxiety, as it suggested that the U.S. economy might be under more strain than previously thought. According to abrdn economist Michael Langham, “US recession fears are back as a dominant theme, driven by a combination of a rapid loss of momentum in the labour market and reports of soft consumer demand in earnings reports. Market pricing is now indicating a belief that the Fed is behind the curve and will cut rapidly in upcoming meetings to avoid a hard landing. This has all spilled into Asian markets, with carry trades unwinding and risk-off sentiment prevalent”.
2) Interest Rate Hikes: Rates are already high in developed countries after a spike in inflation in last couple of years, however, a significant catalyst was the unexpected interest rate hike by the Bank of Japan in July 2024, which raised its key rate to 0.25%. This move surprised investors, leading to a sharp appreciation of the yen. The stronger yen will make borrowing expensive, so it negatively impacted Japanese exports’ potential, which, combined with broader market fears, triggered a massive sell-off in Japan’s Nikkei index, causing it to drop more than 12% in a single day. This sell-off spread to other global markets, exacerbating the downward trend.
3) Global Ripple Effects: The uncertainty in the US and rising fears of a deeper recession has caused ripple effects across global stock markets. Japan’s Nikkei 225, for instance, experienced its worst single day drop since the 1987 crash, South Korea stocks declined nearly 10% in two days, and European markets also faced substantial losses.
4) Earnings Disappointments and Tech Sector Vulnerability: Major tech companies like Alphabet, Amazon, and Tesla have reported earnings that fell short of expectations. These disappointments have been particularly damaging to the tech sector, which has seen sharp declines as they have done quite impressive performance in the last couple of years during higher interest rate environment. Now, the eyes are on Nvidia’s earnings at the end of August to get further clues about the health of the tech boom. The sell-off was further aggravated by the sharp decline in other tech stocks, particularly the so-called “Magnificent Seven” (Apple, Microsoft, Alphabet, Amazon, Tesla, Meta, and Nvidia), which had driven much of the market’s gains earlier in the year. Concerns over overvaluation and the sustainability of the AI boom, coupled with significant moves by investors like Warren Buffett to reduce their equity exposure, contributed to the broader market downturn. According to Morgane Delledonne, head of investment strategy at Global X ETFs “Given their higher valuation relative to other sectors boosted by expectations on future growth, large tech companies are naturally more prone to volatility during risk-off events like today despite strong fundamentals and past performances.”
5) Artificial Intelligence – AI – and Potential Revenues: The artificial intelligence boom remained a key factor to bigtech earnings’ reports this year and a large part of their stock prices appreciation was pricing in the contribution of AI spending to potential revenues. Now, the perception is building where investors are losing patience regarding the return on AI investments. BigTech companies invested enormously in AI over the last few years. Investors are concerned about the size and time of the potential revenue from AI. Companies are avoiding, even they might not know, to provide information on these questions in their reports.
6) High Valuations: After delivering good returns in 2023 and first half of 2024, stocks’ valuations are perceived high when compared to historical standards. High valuations need strong support from the fundamentals that might be deteriorating after high interest rates. According to Chris Metcalfe, IBOSS chief investment officer, “Moreover, some stock valuations have reached unreasonable levels, and we’re now seeing an unwinding of leveraged trades, which is exacerbating the market movements.” Let’s look at graphs below to better understand valuation picture. The US stocks look overvalued based on both forward and trailing P/E multiple, the most widely used valuation measure, compared to 5-year and 10-year averages.
S&P 500 Index Forward PE Ratio (12 month)
S&P 500 Index Trailing PE Ratio
7) Geopolitical Situation and Upcoming US Elections: The ongoing geopolitical situation around the world including Russia-Ukraine war, Hamas-Israel war, increasing tensions between Iran and Israel, trade tensions between China and US, and export restrictions on advanced chips to China, etc., are few of the geopolitical factors that are having their weigh on equities. Additionally, the upcoming US elections in November 2024 also contributing to the uncertainties, and markets do not like uncertainties. Risk-off strategies are always on the radar under these types of situations.
8) Warren Buffett Reducing Equity Exposure and Reduced Apple Stake by 50%: Warren Buffett’s Berkshire Hathaway’s cash pile reached to a record $276.9 billion as per the latest quarter results as he accelerated selling stock holdings in recent quarters including iPhone maker Apple. According to media reports, Buffett sold nearly half of his holdings in Apple in the second quarter. At the end of first quarter, the cash hoard was at then record level of $189 billion. Buffett’s investment moves are highly followed events, and they do have impact on stocks as many other investors take signals from those events and try to follow him. Buffett’s stocks selling was more profound in the last quarter compared to previous three quarters as highlighted in the image below.
Berkshire Hathaway’s Cash and Short-Term Investments
9) Risk Sentiment: Market sentiment works both up and down trends and it adds fuels to the prevailing market situation. It can push asset prices way beyond their fundamental reality. The risk sentiment, measured by the CBOE VIX Index, spiked quickly and reached to the highest point of the year in August. It sparked panic among the investors that contributed to the risk assets sell-off. It is a general tendency in the market when risk levels rise, investors adopt risk-off strategies and shift money to the safe-haven assets like US Treasuries and gold. According to Morgane Delledonne, head of investment strategy at Global X ETFs, “volatility is likely to remain high in the build-up to the Fed’s September meeting and amid the presidential elections”. IBOSS chief investment officer Chris Metcalfe added that the volatility could encourage a shift into bonds. “There has been considerable debate among advisers and commentators about whether to move away from bonds in favour of equities and cash. If market volatility continues, we might see a shift back into bonds, as they are currently acting as a safe-haven. This trend is likely to persist if equities remain unstable, providing a more secure option for investors during these turbulent times.”
CBOE VIX Index
These factors combined have led to a broad-based sell-off as investors move away from riskier assets, picking safer investments like US Treasury bonds and gold. The market remains volatile, with ongoing anxieties about whether the US can avoid a recession and how other economies will be impacted. Overall, this sell-off reflects a confluence of factors, including surprise monetary policy shifts, weakening economic data, corporate results disappointments, and sector-specific concerns, all of which have heightened fears of a global economic slowdown.
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