What’s Behind the Stock Market Sell-Off?

With all three major US stock market indexes on track for a sixth consecutive week of declines – the longest streak in over a decade – the extent of the latest sell-off has investors on edge.

And now that the bull run of 2020 and 2021 looks like a distant memory, it is an opportune time to take a look at what has sparked a shift in sentiment.

Here are five issues that are currently weighing on the stock market.

 

Stubbornly high inflation is stoking fears of an aggressive rate hike path

With central banks around the world embarking on a shift in monetary policy in response to red-hot inflation, investors are assessing what the rate hike cycle might look like, and what it might mean for the economy.

Federal Reserve Chair Jerome Powell has ruled out 75 basis point hikes, but the overnight inflation reading in the US came in at a stubbornly-high figure of 8.3%, while US jobs growth remains extremely robust, lending weight to more rate hikes. The market is likely to continue paying close attention to each inflation reading to see if it remains high, even though there is a growing consensus that inflation may have already peaked in the US.

Nonetheless, if inflation remains elevated, the market may still have some doubts around how aggressively the US central bank will hike rates, especially in light of the Fed already making one backflip around inflation being “transitory”. This uncertainty also extends to whether the Federal Reserve lifts rates above a “neutral” rate, which is typically cited as being 2.5%.

 

Tech giants have been caught up in the sell-off this time

In previous downturns, some of the market’s biggest names have cushioned the fall. This time around, however, a number of these stocks are also feeling the full effects of the sell-off, and that’s largely because they are also warning about the same macro headwinds at the moment.

Apple (NASDAQ: AAPL) recently warned about the supply chain outlook. Tesla (NASDAQ: TSLA) is seeing its manufacturing cut back in China amid lockdowns. Amazon (NASDAQ: AMZN) is seeing inflation weigh on consumer behaviour. Alphabet (NASDAQ: GOOGL) is feeling the squeeze as competition emerges and the revocation of stay-at-home orders changes how its users spend time.

Earlier this week, FAANG stocks had seen their collective market cap sliced by 23% versus the peak from December, 2021, with over US$1 trillion in value lost in just three trading sessions.

 

What’s Behind the Stock Market Sell-Off?

 

Lockdowns in China are crippling an already-strained global supply chain

As the Chinese government pursues its covid-zero policy, lockdowns are in full or partial effect across a large part of the country. The financial and port hub of Shanghai remains the biggest casualty, but the effects are being felt right across the world.

As the world’s second-largest economy, curtailed demand for goods has a flow-on effect for imports, and in turn weighs on exporters all across the world. 

Furthermore, with China being a leading manufacturer and exporter itself, a shutdown in manufacturing and reduced activity across industry has blown-out wait times for key goods across global supply chains.

 

The war in Ukraine shows no sign of ending 

Since late February, the impact of the war has been catastrophic. From a global stand-point, the fallout has also reverberated across the rest of the world. 

With both Ukraine and Russia being key agricultural suppliers, and the region also a major source of energy exports, commodity prices have spiked. This has continued to add to the global inflation equation given decreased supply.

There is a risk that the war in Ukraine could drag on for years, and with no sign of peace, that raises ongoing uncertainty. What’s more, with the likes of Finland and Sweden now also considering joining NATO, Russia has already voiced its disapproval and threatened ‘action’, providing a bleak picture for geopolitics across Europe in the near-to-mid-term.

 

Concerns about a global recession

All of the above lead to an overarching issue that has confronted many onlookers – the risk of a global recession. 

Whether it is the risk of an aggressive rate hike cycle that pushes the world’s largest economy into a recession, China’s ongoing pursuit of covid-zero exacerbating supply chain issues and roiling global trade, or price shock in the commodities market arising from the ongoing fallout of the war in Ukraine – markets have increasingly been pricing in the prospect of a global recession.

In the meantime, whether a recession eventuates or not, negative sentiment is the driving force that has been hitting growth assets particularly hard.

 

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