Wall Street has just suffered its worst week since March, with the S&P 500 and tech-focused Nasdaq both plunging. The S&P 500 has now fallen below its 100-day moving average, which is a key support level. That suggests there is a lot more trouble to come.
So far 2023 has been a positive year for US investors, as the excitement over artificial intelligence (AI) put a rocket under US tech stocks like Nvidia.
The chip maker is up a staggering 190.67 percent year-to-date. However, it has now crashed 11.69 percent in the last month.
I saw the writing on the wall for the Nvidia share price some weeks ago, and it’s been downhill ever since.
It’s the same story the across the mega-cap US tech sector, which has had a stunning year but has looked dangerously overbought for months.
AI has been the only good reason to buy global shares this year, as interest rates soar, China goes into meltdown and the US edges closer to recession.
Although the Bank of England signalled that UK interest rates may finally have peaked, it’s a different story in the US where the economy is growing at a faster lick.
The US Federal Reserve also held interest rates in September, at 5.5 percent compared to the UK’s 5.25 percent, but that was described as a “hawkish pause” as it signalled further hikes ahead.
Higher borrowing costs squeeze economic growth by making businesses and consumers feel poorer, and deterring investment.
They also drive up the interest rates on bonds, which are seen as a lower-risk alternative to investing in shares.
Investors are now pulling money out of the stock market and throwing it into bonds to grab yields of five percent or six percent a year.
Fawad Razaqzada, market analyst at City Index and Forex.com, said: “It’s been a bad week for US stock markets with major indices falling sharply ever since the Fed delivered that hawkish interest rate pause on Wednesday, which weighed heavily on risk appetite.”
Friday saw a short-lived recovery but it didn’t last and Razaqzada predicts another volatile week. “Investors are obviously very concerned about inflation and the path of interest rates in light of the Fed’s warning that rates are not going to come down soon.”
Markets also have to cope with an oil shock as Saudi Arabia slashes production. This could drive the oil price past $100 a barrel, reviving inflation and plunging the West into recession.
Razaqzada said “ballooning US debt levels” are also spooking markets. The only apparent solution is to borrow more and more which he warns “is not sustainable”.
Tech stocks will be first to fall, Razaqzada warned, and he’s not the only one worried.
As I wrote recently, veteran technical analyst Milton Berg reckons Wall Street could crash nearly 50 percent as a “severe recession” sets in. Investment guru Jim Cramer has warned that Wall Street’s enthusiasm for AI has driven share prices to unsustainable levels.
Economist and investment adviser Gary Shilling expects a “violent” 40 per cent crash, saying the Fed has hiked interest rates to a point where investors “can’t stomach another stock”.
He said “markets are reaching the Puke Point as they regurgitate their last equities and swear to never buy another”.
The Fed will keep tightening until it subdues inflation and global economies retreat, Shilling said. “This pattern has been the case in the 12 bear markets associated with recessions in the post-World War II years.
“The lack of a meaningful stock decline recently may forerun a violent ‘catch-up’ drop in the future,” he added.
There is always somebody, somewhere predicting a stock market crash, and recent warnings could be overblown. Yet markets are now falling as predicted, while September and October are notoriously volatile months.
Investors need to keep a cool head at times like these. As “puke point” looms, they may also need strong stomachs.