Monday’s Market Volatility
Monday’s market plunge looks intimidating. Yes, stocks have been “wobbly” recently after repeatedly hitting record highs for much of this year. But on Monday, suddenly the floor fell out.
This caused much finger pointing in the search for something, or someone, to blame. Here are the three most widely agreed upon catalysts for Monday’s sharp decline:
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Japan seems the obvious place to start. Hedge funds stood accused of overusing the carry trade, in which traders borrow at near-zero rates in yen and then invest in higher-yielding currencies elsewhere. For a long time, the yen was low relative to the U.S. dollar, which encouraged the carry. However, in just a matter of weeks, the yen moved up more than 10% against the U.S. dollar, from a relative perspective, a massive move. Many of those borrowed yen were very likely used it to make bets on U.S. technology stocks. The yen’s rise on Monday forced traders to unwind this trade, covering their short yen positions by selling stock.
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Some are ready to blame the Federal Reserve for waiting too long to lower interest rates. Friday’s jobs report showed the economy cooling down, and now people are wondering if an emergency rate reduction is needed before the next meeting. It probably isn’t—the stock market isn’t the economy, and the economy is still in reasonably good shape.
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Then there are those who say the hype around artificial intelligence was overdone. But it was always going to peak. The AI boom may not be over, either—it’s just that investors are getting more discerning about which AI investments are going to make money.
The Monday selloff was more than likely a perfect storm, where all three of these elements unfortunately came together at once. Markets always overshoot, and usually there’s more than one thing to blame. The bigger picture is that stocks are retreating after a long period of gains. That’s normal.
