Nate's take on why the stock market is falling.

You've probably seen the news that the stock market is "crashing", Nate gives his opinion and points to the 3 driving forces behind the markets' recent decline.

For you readers out there, here is the transcript as well!

This has been a rough couple of weeks for the stock market. There have been a number of things going on. Today what I want to break down is, “Why is the stock market crashing?” Why are we seeing all of these news articles saying, oh my gosh, it's the end of times?

When really, it just boils down to three things.

The three things that are causing the stock market to do what it's doing are the Japan carry trade, the great rotation, and the jobs report.

But before we dive into that, I want to define what is a crash, what is a correction, and what is a recession, because right now, we are not in any of them. The stock market has declined. The S&P 500 as of yesterday was down about 8.5% from it’s top. That means that it is not correcting.

It's in a correction if it's below 10%. A crash is really below 20 or even 30%. And a recession is completely unrelated. That is an economic term, not a market term. What I mean by that is that a recession is more about our GDP. It is defined as two consecutive quarters of GDP decline.

Now we can talk about the great rotation. The great rotation is simply that tech stocks have been going crazy this year. Nvidia is the easiest example of that, but pretty much the entire tech sector has been carrying the rest of the stock market for all of 2024. And what investors are saying is that, well, it's been doing really, really well for the last couple of months, we see more opportunities elsewhere because every time something goes up, the potential of it going higher goes down, right?

You want to invest in something that is lower rather than something that is already elevated.

What investors are doing around the world, they are rotating out of tech stocks. That's why we saw the tech sector decline. Before we saw the rest of the stock market start to take a hit. That is the great rotation.

Then there are the more recent events, such as the Japan carry trade. And this is a really big term, I'm going to break it down quickly for you. The way that this works is that Japan right now has very, very low interest rates. In fact, for a while, they had negative interest rates.

What that means is that you would PAY a bank to hold your money for you.

More recently, they've had closer to zero interest rates, and what this meant was that big investors could go and borrow money in Japan for a very low rate. And then they could go and buy a fixed income, or even get into like a high yield savings or a treasury account in the United States. And they make the difference between the interest rate they're paying and the interest rate they're earning. That's the carry trade.

This has been working beautifully and it's a super popular trade.

The thing is, recently the Bank of Japan, the BOJ, said that they're going to raise interest rates. They took what is called a “hawkish stance”.

In doing so they scared a lot of investors out of their carry trade, which means that these investors had to go sell all of their investments and use it to pay off the loans that they had in Japan.

What this does is it puts selling pressure on the investments that they were holding.

These are billion-dollar, or even tens of billions of dollar investors. If they say, “Oh, I got to take a billion off the table to go pay off my loans in Japan”, that's going to cause the stock market to decline.

And then there's the jobs report.

Long story short analysts thought that we were going to get 175,000 new jobs in July. Instead, we only got 114,000.

It got worse because then they had to go back and revise their May and June job numbers. They said at the end of May and the end of June, “This is the amount of jobs that we're adding to the economy”, but they were wrong. What this means is that not only is the economy not doing as well as we thought it would be now. But it actually wasn't doing as well in May and June as we thought it would be either.

The economy is not as strong as people thought. But it is still incredibly strong. One of the main things that freaked the market out is the fact that unemployment is rising. But unemployment as of July is now 4.3%. Up from 4.1% in June, we are talking about very, very small numbers and discrepancies that are causing a large amount of panic.

So, what does this mean for you?

In general, all of this is increasing the chances that interest rates are going to come down because the Federal Reserve controls interest rates at the base level. That means that if they decide to lower them, they will stimulate the economy.

If the economy is not doing as well as we thought, that increases the probability that they're going to go ahead and lower interest rates.

That generally has good effects on the ground. That means that car loans, mortgages, and those sorts of things are cheaper for people. Interest rates coming down is going to be a good thing, but it is tough on investors because now we have had almost a full year of high-yield savings accounts that pay for 4.5%, even 5%. Our clients are in cash accounts at Altruist which pay 5.1%.

That starts to go away when interest rates come down.

We also have the fact that two of these big forces are not correlated to the economy. We have the great rotation, which is just investors moving into different parts of the market, and then we have the carry trade, which is large investors covering and paying off their loans in Japan. Neither of these are representative of what's going on on the ground level in the United States, and the bottom line is that companies are still performing extremely well.

Our economy is still very robust and very, very strong, even if it's not growing at the rate that we thought it would.

And finally, September has historically been the worst month for stocks, period. It is called the September effect. Essentially stocks just don't do well in September, snd you probably know that we're not in September yet.

What I will leave you with is that these next two months provide an incredible opportunity, an opportunity in which maxing out a Roth IRA or contributing aggressively to a taxable account is going to set you up to buy the dip and get in at a time where the markets are really, really compressed, even though the underlying fundamentals of the businesses and the economies involved are still very, very strong.

With that, I hope you learned something, I hope you guys are having a fantastic day and I will see you soon!

Nate Hoskin, CFP®

Founder & Lead Advisor

Hoskin Capital