Market Drop Could Continue
After a 1000-point drop that had fear levels matching the Lehman Brothers collapse of 2008, stocks seem to be pulling out of their massive tailspin. The panic was so great that even safe-haven gold took a small dip as desperate investors sold everything they had to stay afloat. While some think the worst is over, other experts are warning this may just be the beginning. Those looking to protect the value of their portfolios should consider taking a defensive position to brace for more market volatility and recession.
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Dr. Ed Yardeni is the President of Yardeni Research, Inc. He previously served as Chief Investment Strategist of Oak Associates, Prudential Equity Group, and Deutsche Bank. He said the market is not yet in the clear. “The churn will probably continue through September or October, until the November elections.”2
Yardeni identifies the backlash from the yen carry trade as a major cause of the volatility. In this kind of trade, investors borrowed money at nearly zero interest in yen. They then invested it in higher-yielding assets like U.S. stocks. But a rate hike by the Bank of Japan caused the yen to surge. This led to selloffs as investors scrambled to cover their loans. Fears of broad market collapses were sparked.
UBS said market volatility could remain high for some time for several reasons. They pointed to lingering blowback from the yen carry trade. In addition, UBS noted the decline of available money in the economy. They also factored in growing uncertainty about Fed policy and the presidential election. As the Wells Fargo investment president said, the market is “balancing on a hairpin.” 3
Worst to come?
The fall was triggered by the rising yen and growing questions about the AI bubble. Experts worry that situations like the carry trade can result in a vicious cycle. If the yen strengthens, losses will grow. Investors can be forced to sell other assets and buy yen to repay their debt. But this demand further raises the cost of the yen. Contagion could set in as big firms try to cover their margin calls. A massive across the board sell-off could result, with losses reaching into the billions.
A weak jobs report threw gas on the fire, worsening fears that a looming recession is ready to hit the U.S. economy.
Citi noted that markets are on edge ahead of upcoming inflation and employment data. These reports could influence the Federal Reserve’s decision on potential rate cuts in September. Many deem these cuts crucial to averting a recession.
A Citigroup trading strategist suggested the aggressive selling was a sign that traders had to reduce their risk no matter what they needed to offload. The stock market is still seen as overvalued in relation to earnings. For large funds, selling off their positions will take more than just a few days. Meanwhile, other investors may be reluctant to buy assets at fire sale prices. They are wary that big players still have more to unload into the market, depressing prices further. In other words, the steep declines might not be over yet.
Recession Forecast
JPMorgan Chase CEO Jamie Dimon maintains that the chances of a “soft landing” for the U.S. economy are 35-40%, making a recession more likely in his view. He sees significant uncertainties on top of the recent market plunge. Dimon identified geopolitics, housing, deficits, and elections contributing to economic instability. He remains skeptical that the Federal Reserve can reduce inflation to its 2% target. Future spending on the green economy will require continued borrowing, fueling inflation. 4
Billionaire investor Mark Mobius shared that sentiment. He said the stock drop was caused by deeper issues with the economy. And that stocks have more downside on the way. Disruptions in the stock market are usually the signal “before the actual economic effects are seen,” he added.5
Conclusion
The recent crash was a wakeup call that everything that goes up, must eventually come down. As confidence creeps back in the market, economists are warning that this may be the beginning, not the end, of major stock volatility. Analysts say the time has come to move away from risk and shift portfolios into a defensive posture. Risks of recession are on the rise and overall uncertainty about the future is increasing. Now is the time to learn more about protecting the value of your portfolio with safe haven assets like physical gold and silver. Precious metals held in a Gold IRA can shield your savings from wild market swings and recession. To find out more, contact American Hartford Gold today at 800-462-0071.
