Nasdaq 100 and S&P500: Volatility Soars Amid Recession Fears as Investors Flee US Stocks

Wall Street Plunges on Recession Fears

Wall Street’s main indexes fell sharply on Monday as fears of a U.S. recession, triggered by weak economic data last week, rippled through global markets. Markets across Asia and Europe also took a hit, and bond yields declined as investors moved towards safe-haven assets, anticipating the Federal Reserve might need to cut interest rates aggressively to stimulate growth.

At 15:19 GMT, the Dow is trading 38810.76, down 926.50 or -2.33%. The S&P 500 Index is at 5215.81, down 130.75 or -2.45% and the Nasdaq-100 is trading 16331.44, down 444.72 or -2.65%.

Tech Giants Take a Beating

The selloff was particularly severe for the “Magnificent Seven” tech stocks, which had previously driven the indexes to record highs this year. This group is set to lose a combined $1 trillion in market value. Apple dropped 4.6% following news that Berkshire Hathaway halved its stake in the company, signaling potential concerns from Warren Buffett about the U.S. economy or overvalued stocks. Nvidia fell 5.6% due to reports of delays in launching new AI chips. Microsoft and Alphabet each fell around 3%.

Weak Economic Data and Recession Indicators

A weak jobs report and declining manufacturing activity in the U.S., along with poor forecasts from major tech firms, pushed both the Nasdaq 100 and the Nasdaq Composite into a correction last week. The disappointing jobs data also triggered the “Sahm Rule,” a historically accurate recession indicator. Consequently, traders now see an 88% probability that the Fed will cut benchmark rates by 50 basis points in September, up from 11% last week.

Market Volatility and Fed Responses

The CBOE Volatility Index (VIX), known as Wall Street’s “fear gauge,” rose sharply, indicating heightened market anxiety. Chicago Fed President Austan Goolsbee downplayed recession fears but emphasized the need for the Fed to adapt to changing economic conditions to avoid excessive interest rate hikes.

Global Market Influences

The unwinding of the yen “carry trade” has added to global market declines. The Bank of Japan’s recent interest rate hike has reduced the interest rate differential between Japan and the U.S., strengthening the yen and affecting traders who had borrowed in yen to invest in other assets. This has contributed to the market’s vulnerability, as noted by Sam Stovall, CFRA’s chief investment strategist.

Treasury Yields and Sector Performance

U.S. Treasury yields hit their lowest in a year, and the gap between two- and 10-year Treasury notes turned positive for the first time since July 2022, typically a sign of an impending downturn. Despite some respite from a rebound in U.S. services sector activity, all 11 major S&P 500 sectors traded lower, with information technology and consumer discretionary being the hardest hit.

Market Forecast

Given the recent economic data and market reactions, the outlook remains bearish in the short term. The probability of a recession and further Fed rate cuts suggests continued volatility. Traders should prepare for potential further declines and consider shifting towards safer assets until clearer economic signals emerge.

Technical Analysis

E-mini Dow futures are trading lower, but off their low of the session on Monday.

After breaking through 50-day moving average support at 39806, the blue chip average plunged into the 200-day moving average at 38781. After a slight penetration of this level, prices have rebounded in what some are calling “a dead cat bounce”.

If the market can gain enough traction, we could see a rally into the 50-day MA, but if the short-covering fades, then look for sellers to retest the 200-day MA. Holding inside both moving averages will produce a rangebound trade.

Although the sell-off looks ugly, it’s actually constructive since the Dow was getting too far above its key moving averages to sustain the rally.