Stock Market Sell-Off: Causes, Implications, and Strategies

The stock markets sold off sharply due to Fed's rate decision and weak US jobs report, leading to fears of recession and a broad-based selloff.

### Understanding the Recent Stock Market Sell-Off and What to Do Next
* 📉  The recent stock market sell-off was triggered by the Federal Reserve's decision **not to cut interest rates**, despite signs of economic weakness in the US job market.
* 🇺🇸  US tech and growth stocks, particularly Mega cap Tech stocks, were hit hardest by the sell-off, with the S&P 500 experiencing a **broad-based decline**.
* 🇯🇵  The Japanese stock market, particularly the topics index, saw its **worst one-day fall ever**, possibly exacerbated by the **unwinding of the carry trade** due to increased volatility in the Japanese Yen.
* 💼  Despite the sell-off, US corporate earnings remain strong, with **brisk growth expected in the near future**.
* 📊  US valuations are still **relatively high** compared to global markets, but some correction is expected as stock prices return to **more reasonable levels**.
* 🏦  The Federal Reserve has room to cut interest rates if necessary, with markets pricing in **multiple rate cuts in the coming months**.
* 💰  The overall view is that this sell-off is likely to be **short-lived**, with the market expected to **bounce back relatively quickly**.
* 🛒  The advice for investors is to **stay the course**, avoid panic selling, and consider taking advantage of lower prices to buy assets on their **"market crash shopping list."**

stock markets have sold off sharply, and investors are panicking. In this video, we'll look at what happened and why. I'll also give you my view about what's next and also what to do about it. Let's begin with what happened. The Federal Reserve, at the end of July in its monetary policy meeting, said that it wouldn't be cutting interest rates. It was going to keep them at very high and restrictive levels. That's despite the fact that inflation was pretty close to its target. Following that meeting and that statement, the jobs report from the US showed signs of weakness, and there was a feeling by many people in the market that the Fed was behind the curve. It should have cut, and it didn't, and that was going to weaken the economy and perhaps trigger a recession in the US. The stocks which sold off most were the Mega cap Tech growth stocks, and of course, because of the concentration of the US market in those names, there was a fairly significant sell-off in the index. Not a huge sell-off, but a pretty large

one then we had the weekend. When markets were shut, but on Monday when markets opened in Japan, there was a huge selloff. And if we look at the fall in the topics index for Japanese stocks, it suffered its worst one-day fall ever. It fell by over 12%. And you'd have to go all the way back to the 2010s and previously to see a fall of a comparable magnitude. Turning back to the US market, it certainly wasn't an indiscriminate. If we break down the returns from the peak of the S&P 500, which was July the 16th to August the 2nd, which is that Friday following the FED meeting, you can see that there were some sectors which were overvalued, particularly Tech and consumer discretionary stocks, where the sell-off was largest. Those two sectors fell by 12% and 9% respectively. Then at the market open on Monday in the United States after After Japan had already opened, of course, we saw that several big names fell. And it was some of those Mega

cap overvalued tech stocks, which fell the most, but it was a broad-based selloff, and many of the stocks in the S&P 500 fell. Volatility, which is the typical annual percentage price move for the United States stock index, the S&P 500, spiked. And if we look at the VIX Index, which measures implied volatility backed out of the op Market, that spiked to levels which are typical of a huge crisis. It topped 60% at a certain point on Monday. It has since Fallen back. Now, if you are worried about Market losses and what you should do about these sell-offs, then being part of our community is a great way to manage those fears because you'll speak to like-minded people who see markets as a long-term investment and don't panic when they see sell-offs such as these. So having that accountability, that shared mindset is very useful. At least that's what our community tells us. Furthermore, as part of our community, you get access to all sorts of goodies such as members-only videos and these

trackers, which help you monitor things like volatility, which I've just been discussing in this video, but also things like credit spreads. So, if you do want to join us, it's really easy, and we'd love to have you as part of the community. Just go to our website, PensionCraft. Link to that in the description below. So, why has all of this happened? I think there was a big contrast between the reading of the economy, which the FED gave during its press conference. This was on July 31st, and what the markets saw in the employment data shortly afterwards. So, to quote Pal's summary of the economy, he said, Look at the first half growth numbers. Look at PDFP, that's private domestic final purchases, of 2.6% for the first half. It's not signaling a weak economy. It's also not signaling an overheating economy. The labor market, admittedly the unemployment rate has moved up 7/10, and we're seeing a normalization there, but wage increases are still at a high level.

unemployment is still at a low level. Layoffs are very low. Initial claims have moved up, but they're pretty stable, and they're historically not high at all. So, the total scope of the data suggests a normalizing labor market. And again, we're carefully watching to see that continues to be the case. And in a regular survey of fund managers in America, this is published by Bank of America, you can see that 2third of fund managers think there's going to be a soft Landing. In other words, inflation will come down without unemployment surging or a US recession. So, that's what markets were expecting. But then when the Bureau of Labor Statistics published its jobs report, its employment situation summary on August the 2nd, it painted a much weaker picture of the US jobs Market than Powell had laid out. Or at least that was the feeling of Market. The unemployment rate picked up to 4.3%, and that was sufficient to trigger the S Rule. And this is a rule which hasn't gone wrong ever, at least not

while there's been recorded data now Claudia Sam herself says that the US is not in recession. So this is probably the first false positive that the rules come up with. And I should say that it's not a rule as Jerome poell also pointed out. It's actually just an empirical observation. However, there's no question that jobs in the US unemployment rates are moving in the wrong direction and doing so pretty rapidly. Now part of that is because the participation rate, the proportion of the US population which are in work, has increased. And that's because more people are entering the jobs Market but also immigration's been pretty high. But still it is moving in the wrong direction. And if we look at the non-farm payrolls report that came out, this is the number of jobs being added to the US economy every month, that was also very weak below expectations and markets didn't like it. Now turning to Japan and instead of looking at the stock market, if we look at the Japanese bond market, remember when people are scared they buy bonds, you can see the

reaction to various pieces of news as we go through this timeline. So, the three important events here are when the Bank of Japan changed its monetary policy. It effectively ended yield curve control, which was keeping yields low. Markets did respond to that, but not hugely. The response to the Fed's monetary policy decision, which was to do nothing, also was very muted. But the really big shock came in response to the US jobs data. Now, some people think that this was amplified the moving markets in Japan by what's called unwind of the carry trade. What's the carry trade, you wonder? Well, the idea here is that Japan had monetary policy, which was very much at odds with the rest of the world. All other central banks around the world had raised their policy rates hugely, while the Bank of Japan hadn't. That meant that you could borrow in Japan very cheaply and invest elsewhere at a much higher rate. So, what the trade involves is borrowing in Yen, then you sell your Yen and buy a foreign currency where rates are much higher. For example, in Mexico, the policy

rate is over 11% now. That's all very well until you start to get destabilization of currencies, and the Japanese Yen certainly has had its volatility pick up. So that meant that a lot of hedge funds, which do the carry trade, had to unwind their trade. Also, if you get margin calls, then you have to close out trades, which may be unrelated to the carry trade, in order to get cash to pay the margin. So, this is how volatility can spill from one trade, the carry trade, into other markets. In this case, the topics index and the Japanese stock market, because what you do in a crisis is you sell the liquid stuff, which is often stocks. So, what's next from here? If we look at US valuations, they're still pretty high. You compare them with the rest of the world, and you'll see that the S&P is overvalued. If you break it down by country, only India is more expensive. But if the US does go back to its 10-year average forward price-to-earnings multiple, that would mean a

sell-off of about 4%, which is probably already happened by the time you see this video. If it goes back to the 10-year average, there's probably another 10% to fall. So, I think some of this sell-off in the United States, at least, has simply been some of the inflation of stock valuations easing somewhat, and we're coming back to more reasonable valuations. If we look at what really matters, which is the profit that US companies are generating, here you can see that year by for the S&P 500. The dark blue bars are the ones which we've already observed up to 2023, and the dashed bars are for 2024 and 2025 based on analyst forecasts. It's not the case that we're expecting a huge earnings recession, far from it. What we're seeing at the moment is pretty brisk earnings growth. Okay, some stocks have disappointed, but that's off hugely overinflated expectations. This is not an earnings recession, and that means that there's going to be underlying support.

for the S&P 500, once investors start to see forward price-to-earnings multiples falling to a certain level, I think that buyers will step back in. Furthermore, the Fed's current policy rate is above 5%. That means they've got a huge scope to cut interest rates aggressively if there is a huge weakening of the US jobs market. If we look at what markets are pricing in in terms of probabilities for rate cuts from the Fed, you can see that what we've got now are two jumbo rate cuts, one in September, one in November, of 50 basis points each, and then following that, we'll get four successive 25 basis point cuts. So, a very aggressive path is what markets expect from here. Some people have even been talking about an inter-meeting rate cut. I think that's unlikely, given that it would signal that things are in a really bad state, which if you look at the US economy, they really aren't, because what usually causes problems is leverage, either with companies or with households, and at the moment, we're just not seeing that much.

leverage in either of those two places. Furthermore, if we look at credit availability, sure banks are still tightening in the United States. If we look at the senior loan officers survey, that's the red bars you can see here, but they're not as tight as they were. So if companies want to borrow, they can do so. Furthermore, if we look at the credit market, you don't see a huge increase in borrowing costs for corporates, whether they're investment grade or high yield. So it's still possible for companies to borrow, not as cheaply as they could, but it is possible. And that means that growth in the US and in US corporate earnings importantly won't grind to a halt while borrowing is still possible. So overall, my view is that this is going to be a fairly short-lived selloff, at least that's my hope based on these economic data which don't look too bad. Now let's start to think about what to do about it. Recently, I did a video about my market crash shopping list, the idea

here is identify things you want to buy. Maybe you think you've missed the boat because their prices were too high. So what you can do is buy them at reduced prices. For example, if you like US small caps, well, you've got a second bite of the cherry now that they're cheaper again. These things beside me are the ones on my market crash shopping list, but I'm sure you've got your own. But importantly, what this market crash shopping list does is to reframe a selloff as a sale. You can buy the things you like at a reduced price, and that means you're not panicking and selling your equity, which is, of course, the worst thing you can possibly do. Because what often happens is that markets snap back much more quickly than you'd expect. If you look at the typical time the US market spent below its all-time high, it's only 2 months. Markets snap back very quickly to a new all-time high. So if you sell at the first sign of trouble, you'll be left locked out of markets and

you'll end up having to buy your stocks back at a higher price. And if we look at the probability of a fall of a certain magnitude over the coming year, I use this rule of thumb which I call the 2616 rule. The probability of a 30% greater fall over the next year for the US market, at least, is just 2%. It's a very rare occurrence. And also, if we look at these decade-long periods when markets don't recover to their previous all-time high, again, that's very rare. We recently had one between 2000 and 2012, but that came as a double crisis. So in conclusion then, if you do have Equity Holdings, which almost all of us do, don't sell them. If you are still saving into markets as part of your accumulation phase of your Investments, then carry on doing it because what you're doing now is buying at lowered valuations which boosts your long-term returns. If you're post-retirement, then whatever you do, don't sell your stocks because what that

usually means is that you end up crystallizing a loss, and that's going to hurt your retirement fund immeasurably. So people tell me they watch these videos sometimes because I'm telling them not to panic. Well, here it is: don't panic. And I think you should really stick with your investment plan, and of course, that plan should include fallbacks like this, and you should always try not to sell in these market pullbacks. It's a sale; it's not a disaster. So if you do want to join our community and be soothed further, but also share a bit of humor about the market selloff, then you can do that very easily. Just go to our website, pensioncraft.com/membership. You'll also find a link to that in the description below. And as always, thank you for listening.

Stock Market Sell-off: Why & What’s Next?

My name is Ramin Nakisa and I started PensionCraft in 2016 as I felt strongly that I wanted to teach people how to invest well for themselves so they could stop making costly mistakes and losing their money through having to pay unnecessarily high fees.

Before starting PensionCraft, I worked in investment banking as a strategist and I was a frequent contributor on CNBC and Bloomberg TV. I have written two books about finance and investment: one for professional investors and one that explains how to buy and sell volatility using exchange-traded products.

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The Sharp Stock Market Sell-Off: What Happened and What's Next

The sell-off was triggered by the Federal Reserve's decision not to cut interest rates, leading to concerns about economic weakness and a possible recession.

The tech and consumer discretionary sectors were the most affected, with the Japanese stock market also experiencing a historic one-day fall.

The spike in volatility, reaching levels typical of a major crisis, caused panic among investors, but being part of a community can provide support and a long-term investment perspective.

The Divergence Between the FED's View and the Market's Reality

The FED presented a positive outlook on the economy, citing growth numbers and a normalizing labor market, but the market saw a much weaker US job market, with increasing unemployment rates and a below-expectation non-farm payroll report.

The discrepancy between the FED's assessment and the actual market conditions has led to concerns and triggered a negative market reaction, especially in the US and Japanese bond markets.

Despite the FED and some fund managers expecting a soft landing for the economy, the market's perception of the US job market has been one of rapid deterioration, leading to uncertainty and unease.

The Impact of Monetary Policy Decisions on Global Markets

The Bank of Japan's shift away from yield curve control had a moderate impact on the markets, while the Fed's decision to maintain its policy had a muted response.

The US jobs data caused a significant shock, leading to the unraveling of the carry trade and increased volatility in the Japanese Yen, prompting hedge funds to unwind their trades.

This volatility also affected the Tokyo stock market and the topics index, highlighting the interconnectedness of global financial markets.

Analysis of the Current Stock Market Situation

The recent 4% sell-off in the US stock market is attributed to a correction in overvalued stock prices, with a potential further 10% decline.

Despite some stock disappointments, there is overall strong and brisk earnings growth, indicating underlying support for the S&P 500.

The Federal Reserve has the flexibility to aggressively cut interest rates if there is a significant weakening of the US jobs market, with markets pricing in multiple rate cuts, reflecting an aggressive path expected ahead.

The Impact of the Market Selloff on Borrowing and Investment

Borrowing for companies is still possible despite some tightening by banks in the US.

The current market selloff can be seen as an opportunity to buy desired assets at reduced prices, reframing the situation as a potential investment sale.

It is advised not to panic and sell equities, as markets have historically shown a quick snap back after a selloff.

The probability of a 30% or greater market fall in the US over the next year is very rare, at just 2%.

During market pullbacks, it's advised not to sell stocks, as this can crystallize a loss, especially for those in the post-retirement phase.

Stick to your investment plan, avoid panic selling, and consider buying at lowered valuations to boost long-term returns.