Weekly Update: Here’s Why Stocks Are Crashing

Ross Givens on August 5, 2024

Good evening, and welcome to this week’s edition of Stealth Trades!

The stock market is in the middle of a bloodbath.

The Nasdaq fell more than 3,000 points from the highs in early July to Monday morning.

When big drops like this happens, everyone wants to know the reason. There’s always something to point to. But in my opinion, last week’s events were simply the straw that broke the camel’s back.

I typically put this email out on Friday evening. But with so much activity taking place, I wanted to see how things shook out today before sharing my thoughts.

Anyway, here’s what happened…

Friday’s jobs report was 35% below expectations. Economists were expecting 175k new jobs created last month. Turns out it was only 114k. This goes directly against authorities who have been adamant about the US not being in a recession.

Interest rates are crashing…

The 10-year bond yield fell 50 basis points in just over a week as investors began pricing in expectations of Fed rate cuts.

But not every country followed suit. Japan, where interest rates have been the lowest in the world, decided to RAISE interest rates to combat inflation.

No one was expecting it. And the market reacted violently.

Japan’s Nikkei index fell 12.3% – the worst single-day drop since Black Monday in 1987.

Japan’s stock market fell more than 20% in total last week, wiping out all of its 2024 gains. And because of the global market we live in today, the ripple effects hit every major market this morning.

The Nasdaq opened down 5.4% this morning – adding to a 2.4% decline the day before. The S&P, Russell and Dow all dropped as well.

But it wasn’t just the meltdown in Japan that cratered stock prices over the weekend.

America’s favorite value investor, Warren Buffett, also revealed damaging news on Friday. His quarterly report showed that Berkshire Hathaway sold more than half its position in AAPL stock last quarter.

AAPL makes up roughly half of Buffett’s stock portfolio, making this a huge move to safety. Berkshire now holds its largest cash position ever – a record $277 billion.

In fact, Buffett now holds more T-bills than the Federal Reserve.

Investors have been cautiously bullish all year in my opinion. After the AI boom, valuations have become somewhat inflated.

One metric investors watch to gauge this is the ratio of Total Market Cap to GDP. It reflects what percentage of gross domestic product the US stock market is worth.

According to Buffett, markets are overvalued when this figure exceeds 120%. Last week it was at 193% – the highest reading since the 2021 highs.

And when the world’s most famous stock picker starts heading for the exit, other investors are going to follow.

So, what now? Is this the beginning of another bear market? Or will this be just another pullback – albeit a fast and deep one?

It’s too early to say. In my opinion, the level you want to watch is 510 on the SPY (S&P 500 ETF).

This was today’s low following the Japan crash. It also coincides with the May pivot that triggered the most recent rally.

If this is indeed a short-term dip, investors should continue buying at these discounted prices and push stocks higher. If the Monday low is broken, that means assets are still too expensive, and we will likely fall further.

The only upside here is that interest rates have come down. This should help bolster the home construction market and, if we see some emergency rate cuts, push other stocks higher as well.

We are already seeing these effects now. If you look at the top-performing market sectors over the last month, you’ll notice the top 5 are all tied to construction.