After months of relative calm, financial markets were rattled this week, leaving investors scrambling for cover.
Japan’s Nikkei 225 plunged over 12% on Monday, its steepest decline since the 2008 financial crisis.
In the U.S., the S&P 500 lost more than 3%, wiping out $1.3 trillion in value, marking its worst day since the bear market 2022.
The Dow tumbled 1,000 points, and the Nasdaq Composite sank deeper into correction territory. All three major indexes were in the red by the week’s end.
What triggered this chaos? The unraveling of the yen carry trade was the first domino to fall.
Investors had been borrowing cheap yen to invest in higher-yielding assets like stocks and bonds, a strategy made attractive by Japan’s low interest rates.
However, the Bank of Japan’s unexpected rate hike last Wednesday—its second this year—strengthened the yen and upended those trades.
The situation worsened when a disappointing U.S. labor report further spooked the markets. Companies added just 114,000 jobs in July, missing forecasts by a wide margin.
The unemployment rate ticked up to 4.3%, the highest since October 2021.
This grim news sent the dollar into a tailspin, prompting investors to unwind their yen carry trades and stoking fears of a looming U.S. recession.
The shockwaves hit Wall Street hard on Monday. The VIX, Wall Street’s fear gauge, soared to a two-year high.
Stocks tanked, bond yields tumbled, and calls for an emergency rate cut from the Federal Reserve grew louder, with rates already sitting at a 22-year high.
Wall Street spent the rest of the week trying to shake off Monday’s bruising losses.
Tuesday and Wednesday saw strong rallies at the open, only to fizzle by the close.
By Thursday, the tide turned slightly, with encouraging jobless claims data boosting the S&P 500 by 2.3%, its best day since late 2022.
Still, some investors warn that the volatility may not be over. The yen carry trade is massive—how much remains is anyone’s guess.
Steve Sosnick, chief strategist at Interactive Brokers, summed it up: “Nobody really knows how big it is.”
The timing of this turmoil couldn’t be worse. August is notorious for market swings, as trading volumes thin out with many investors on vacation.
Add to that the uncertainty surrounding the upcoming U.S. presidential election and the escalating Israel-Hamas conflict, and it’s no wonder Wall Street is on edge.
Next week, all eyes will be on retail sales data and earnings reports from heavyweights like Home Depot and Walmart.
With business and consumer spending driving two-thirds of the U.S. economy, these numbers could offer vital clues about the health of the American consumer.
Despite the wild ride this week, stocks are still on track for solid gains in 2024: The S&P 500 is up 12%, the Dow has climbed 4.8%, and the Nasdaq has gained 11.6%.
As Liz Young, head of investment strategy at SoFi, noted in a Thursday report, “If we needed a reminder of why portfolios should remain diversified, even during periods of concentrated rallies, we just got it.”
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