Anxiety over the U.S. economy
Despite some signs of cooling, the U.S. economy kept chugging along even with higher rates, outpacing Europe and Asia. Then came last week’s economic reports.
Weak reports on manufacturing and construction were followed by the government’s monthly report on the job market, which showed a significant slowdown in hiring by U.S. employers. Worries that the U.S. Fed may have kept the brakes on the economy too long spread through the markets.
Big Tech movements
A handful of Big Tech stocks drove the market’s double-digit gains into July. But their momentum turned last month on worries investors had taken their prices too high and expectations for their profit gains had grown too difficult to meet—a notion that gained credence when the group’s latest earnings reports were mostly underwhelming.
Apple fell more than 5% Monday, after Warren Buffett’s Berkshire Hathaway disclosed that it had slashed its ownership stake in the iPhone maker. Nvidia lost more than $420 billion in market value Thursday through Monday. Overall, the tech sector of the S&P 500 was the biggest drag on the market Monday.
Japan’s rollercoaster
The Nikkei suffered its worst two-day decline ever, dropping 18.2% on Friday and Monday combined. One catalyst for the outsized move has been an interest rate hike by the Bank of Japan last week.
The BoJ’s rate increase affected what are known as carry trades. That’s when investors borrow money from a country with low interest rates and a relatively weak currency, like Japan, and invest those funds in places that will yield a high return. The higher interest rates, plus a stronger Japanese yen, may have forced investors to sell stocks to repay those loans.
What are carry trades?
A carry trade is a strategy used by bond traders, currency traders and others hoping to profit from differences in interest rates.
Imagine you’re a kid, and you borrow $5 from your mom to loan it to your brother and charge him $2 interest. That’s similar to a carry trade. When short-term rates are lower than longer-term rates, a bond trader can borrow at the lower short-term rate and invest the proceeds at the higher long-term rate. Similarly, a currency trader can borrow currency in a country with low interest rates and invest the money in another country, where rates are higher and attractive investment returns are expected.
Read “What is a carry trade?” from the MoneySense Glossary.
What should investors do now?
The prevailing wisdom is: Hold steady. Experts and analysts encourage taking a long view, especially for investors concerned about retirement savings. “More often than not, panic selling on a red day is generally a great way to lose more money than you save,” said Jacob Channel, senior economist for LendingTree, who reminds investors that markets have recovered from worse sell-offs than the current one.
Bitcoin was back up to $56,490 Monday morning after the price of the world’s largest cryptocurrency fell to just above $54,000 during Monday’s rout. That’s still down from nearly $68,000 one week ago, per data from CoinMarketCap.
