Global stock markets plummet in panic: Concerns about a recession in the U.S. economy, Buffett has already "stepped back halfway."

Author: Ji Zhenyu, Editor: Liu Peng, Tencent News "Qianwang"

Global stock markets have entered a panic sell-off mode.

In early August, the Bank of Japan and the Federal Reserve announced their monetary policy decisions in succession. The Bank of Japan announced a 25 basis point interest rate hike, while the Federal Reserve decided to keep the benchmark interest rate unchanged but clearly signaled a high probability of a rate cut in September.

The market reacted swiftly, with the yen soaring against the dollar, and the "carry trade" of borrowing cheap yen to invest in high-yield markets came to a halt. The positive boost from the Federal Reserve's clear rate cut signal for the U.S. stock market lasted only a day, as Japanese, European, and U.S. stock markets experienced a comprehensive decline during the trading days in early August.

Greater concerns stem from negative signals in the U.S. economic fundamentals. The ISM Manufacturing Index, which reflects factory activity, fell short of expectations, the number of first-time unemployment claims reached a new high since August 2023, and July's non-farm payroll data showed an increase in the unemployment rate. Panic over a potential recession in the U.S. economy swept through the market.

Criticism of the Federal Reserve followed, with many economists pointing out that the Fed's path of adjusting monetary policy based on economic data is too conservative and lagging. From the current situation, the decision to "hold steady" in July was a mistake, and the Fed can only compensate by increasing the magnitude of future rate cuts.

As a new round of economic data and macro environment changes emerge, investors' expectations are also beginning to shift, with expectations for significant rate cuts by the Federal Reserve before the end of the year starting to dominate the market.

In addition to macroeconomic factors, concerns about whether generative AI can deliver on large-scale investments are also putting pressure on the market. In early August, tech giants with trillion-dollar market capitalizations, such as Microsoft, Google, Apple, and Meta, released their earnings reports. Despite significant investments in generative AI, the corresponding new revenue and profits did not increase proportionally, prompting Wall Street to rethink the related valuations.

In fact, since the beginning of this year, the overall rise in the U.S. stock market has been mainly driven by the strong performance of giant companies benefiting from the generative AI concept. The trend of capital concentrating on leading companies has intensified, and excluding these factors, the stock price performance of most listed companies in the U.S. is not very ideal. After this round of general pullback among tech giants, the U.S. stock market may enter a new adjustment period.

Another signal that may support the above view is that Berkshire Hathaway, led by "Oracle of Omaha" Warren Buffett, recently announced its second-quarter earnings report, showing that Buffett significantly reduced his largest holding, Apple, by nearly 50%, while cash reserves reached a historic high of $276.9 billion, a substantial increase of 46.5% from the first quarter. The "Oracle of Omaha," who has been a dominant force in the U.S. stock market for over half a century, may have already sensed the market's anomalies.

Currently, "recession trades" dominate the market, and negative sentiment is spreading. On the other hand, the Federal Reserve's rate cut in September and subsequent large-scale rate cuts have also become highly probable events, which may provide conditions for the market to rise later.

A person from a U.S. private equity firm who previously worked at Citadel and Point72 told Tencent News "Qianwang" that investors often find themselves in a dilemma during extreme market conditions. On one hand, previous positions have suffered heavy losses, making them susceptible to the market's extreme pessimism. On the other hand, some investors consider "buying the dip," but given the current market conditions, it may take some time for a correction, and blindly entering the market may be irrational. He suggests that ordinary investors wait until the current volatility slows down and market trends become clearer before making corresponding decisions.

Global Panic Sell-off: Major Markets Unscathed

On August 1, the Dow Jones Industrial Average fell more than 700 points at one point, the S&P 500 index dropped 1.37%, the Nasdaq Composite Index fell 2.3%, and the Russell 2000 index, which covers more small and medium-sized enterprises, plummeted over 3%.

On August 2, with the release of the latest U.S. non-farm payroll report, the market showed no signs of stopping its decline; instead, the extent of the drop increased. The S&P 500 index continued to plunge 1.84%, the Nasdaq Composite Index fell over 2.4%, and the Russell 2000 index continued to decline by more than 3%.

Investor pessimism enveloped global markets, with major markets almost universally affected. The Nikkei index in Japan continued to decline on August 1 and 2, recording its largest single-day drop in over four years, and European stock markets also experienced widespread declines.

On August 5, the Japanese stock market opened with further declines, with the Nikkei 225 index dropping over 4%, and the Topix index's decline expanding to 3%. For the first time since January 11, the Nikkei 225 index fell below 35,000 points.

This round of declines in the U.S. stock market was led by heavyweight stocks, including tech giants like Apple, Microsoft, Amazon, Google, and Nvidia, all of which saw declines between 3-5%, indicating a clear sign of large-scale capital outflows. The volatility index, which measures market panic, surged 23%, reaching its highest level since October 2023.

Market Sentiment Takes a Sharp Turn: Multiple Factors Weigh on U.S. Stocks

On July 31, U.S. time, the Federal Reserve's July meeting decision was finalized. Although it did not announce a cut in the benchmark interest rate, the Fed almost sent a clear signal to the market about initiating the first rate cut in September.

Investor optimism was evident that day, with the Nasdaq Composite Index, which is most sensitive to interest rate levels, rising sharply by 2.64%, and other sectors also experiencing varying degrees of upward momentum.

However, this market performance was later validated as a fleeting moment. The day after the Fed's meeting, the U.S. stock market began to plummet. The immediate cause was the ISM Manufacturing data for July, released on August 1, which came in at only 46.8%, below previous market expectations. This index reflects the state of factory activity in the U.S. and is widely regarded as a signal of economic activity contraction.

Subsequently, the non-farm payroll data released on Friday further heightened investor concerns, showing that the unemployment rate in July rose to 4.3%, the highest level since 2021. Combined with the previous day's report of first-time unemployment claims reaching their highest level since August 2023, it indicated that the U.S. job market was showing clear signs of slowing down.

The optimism regarding the Fed's rate cuts lasted only a day, as market sentiment took a sharp downturn, with the earlier "optimism triggered by rate cuts" instantly transforming into "panic selling related to recession."

Some analysts began to criticize the Federal Reserve for its slow shift in monetary policy, claiming it missed the best opportunity to avoid a hard landing for the economy.

Some economists believe that the Federal Reserve has found itself in a very passive position. On one hand, the Fed has repeatedly emphasized the need to rely on economic data to make corresponding decisions. On the other hand, due to the significant lag in economic data, if the Fed strictly follows economic data to adjust monetary policy, it will inevitably lag behind. Currently, the situation is developing increasingly unfavorably for the Fed.

As economic data shows clear signs of weakness and the Fed signals a high probability of initiating a rate cut cycle in September, the market has formed a new round of expectations regarding the Fed's rate cuts. Investors now expect a significantly increased probability of a 50 basis point rate cut in September rather than 25 basis points.

Under such expectations, the Fed's policy-making is caught in a dilemma. On one hand, if the Fed directly cuts rates by 50 basis points in September, it would undoubtedly signal to the outside world that the Fed previously misjudged the situation and can only compensate for its previous slow actions with a larger one-time rate cut. On the other hand, if the Fed continues with its previously planned pace of a 25 basis point cut, it will be unable to curb the rapid decline of the economy.

Additionally, another major factor contributing to the significant pullback in U.S. stocks comes from external influences. The day before the Fed announced its monetary policy decision, the Bank of Japan announced a 25 basis point rate hike, causing the yen to rise against the dollar. The previously popular carry trade of borrowing cheap yen to invest in the U.S. stock market came to a halt, negatively impacting the U.S. stock market in the short term.

Moreover, the U.S. stock market is currently in earnings season. Some tech giants that have already released earnings reports, such as Microsoft and Google, despite maintaining solid fundamentals, did not see significant increases in new business revenue and profits related to generative AI, even as capital investments continued to grow significantly. This reflects that leading companies are still in a "arms race" phase, and the true added value generated by generative AI has not yet fully manifested in their earnings reports, prompting investors to begin re-evaluating the valuations of related listed companies.

Rate Cut Actions Are Clear, Magnitude Still Under Discussion

After experiencing significant market sell-offs last week, investors are currently focused on two main aspects: first, whether the Federal Reserve is slow in adjusting monetary policy and how to form expectations for the Fed's next moves; second, whether the generative AI concept can continue to sustain the high valuations of certain companies.

Regarding the first question, many economists closely monitoring the Fed's actions have expressed their opinions. Julia Coronado, founder of research firm MacroPolicy Perspectives, stated that the Fed is indeed acting too slowly and needs to catch up.

Mark Zandi, chief economist at Moody's, bluntly stated that the Fed made a mistake and should have made a rate cut decision months ago.

"It feels like making a 25 basis point rate cut decision in September is far from enough; cutting by 50 basis points and adopting more aggressive monetary policy measures is what the Fed needs to do," Zandi said.

Michael Feroli, chief U.S. economist at JPMorgan, also believes that the Fed should have made a rate cut decision at the Federal Open Market Committee meeting at the end of July, and under the current circumstances, they must cut rates quickly.

He expects the Fed to make consecutive 50 basis point rate cut decisions at its September and November monetary policy meetings.

Real-time updates from the Chicago Mercantile Exchange's FedWatch tool show that the market currently expects a 78% probability of a 25 basis point rate cut at the Fed's September meeting and a 22% probability of a 50 basis point cut. By the time of the last Fed meeting of the year, the market expects a cumulative probability of a 125 basis point rate cut to be 2.6%.

However, some economists have expressed relatively cautious views. Blerina Uruci, chief U.S. economist at T. Rowe Price, believes that a one-time 50 basis point rate cut currently seems a bit aggressive, as it would clearly signal to the outside world that the Fed indeed acted slowly, potentially leading to greater market panic.

She believes that the determination of the rate cut magnitude will also depend on the data from the August non-farm payroll report. If the data shows that July's figures were merely over-interpreted due to weather factors, then Fed officials may consider a 25 basis point cut to be more appropriate.