The plunge continues. It’s always a mug’s game trying to call the top of any market, but the plunge on Wall Street does feel as though it has got legs, so it is quite possible that we have indeed seen the peak for US equities.
Since last week the Nasdaq has moved into correction territory – jargon for a 10 per cent or more fall – and on Monday was off another 3 per cent. I rather like the expression ‘correction’ because it implies that the markets have simply made a bit of an error, a ‘terribly sorry, folks, but we all make mistakes, and give us a few weeks and we’ll correct them’ sort of thing. But the question of course is whether this is indeed merely a correction or the start of a bear market, not only for the high tech companies on the Nasdaq, but something more broadly based.
Three things seem to be happening.
One is the shock reaction to Donald Trump’s tariffs. Disruption is never good for any economy, even one as robust as that of the United States. That has been the trigger for the shift in mood over the past month. Remember that shares were at or close to their all-time peaks three weeks ago. The sudden realisation that the new President might actually do what he says rather unnerved investors, then when markets did fall, his reaction that he would not rule out a recession troubled people some more.
That leads to the second point: that the US may already be in recession. I noted last week that the economic model of the Atlanta Fed was signalling that this might be the case. If that is right then corporate earnings will inevitably be hit, and that reduces the case for holding US equities vis-à-vis those of other major economies. Yes, you have to be in the American market because it is so huge, but maybe you cut your allocation a few points. I highlighted earlier the way in which the main UK and European stock markets were all up this year, whereas the US ones were all down. Actually Mexico and China were up too so far this year, and the Toronto index, while off a bit was doing no worse than New York.
Number three is the switch out of high-tech shares. That has become vicious. Apple, the giant of them all, was off more than 6 per cent in Monday morning trading. That’s a couple of hundred billion dollars of wealth in one company destroyed before lunch. I find it hard to think of any other occasion when so much money has disappeared so fast. You could say that the value never really existed, that it was only paper wealth. But if you believe that, then maybe the entire high-tech sector is far too highly valued.
We will see. As I said, it is always a mug’s game to call the turn. Maybe there will be a fight back. But what is happening is huge.
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