Financial markets are belief system. The financial markets are belief systems.
If these beliefs are true, then valuations will rise. When they break, however, the whole thing snaps.
On Monday, $1.4 trillion in stock market value vanished. Dow Jones had the worst April in 1932.
S&P 500 now has the lowest performance of any US President since 1928.
Investors worry. Dollar is falling, bonds are increasing, and demand for safe-haven investments has increased.
It is a sign that there has been a market malfunction.
Dot-com bubble part II?
The dot-com boom burst exactly 25 years ago. Investors poured money in any company with a website back then.
The valuations fell when the stories did not produce results. Nasdaq fell 78% over two years. Cisco lost 86%. Amazon fell 95%.
The current version of the game is AI. It’s real. Technology is here. Once again, the expectations are set as though nothing could go wrong.
Nvidia’s stock is worth more than 30x its sales. This is not only expensive. Risk is historically uncommon and difficult to justify.
The real danger isn’t the technology. The real risk is not about technology.
Nvidia was unusually conformant with US export regulations, redesigning even chips (H20 A800 etc.). Just to remain in the Chinese marketplace.
The administration is constantly shifting the goals. Investors are now waking up due to the geopolitical fragility in Nvidia’s business model.
Markets will reprize when 13% of revenue is on the line and you are unable to control what policy drives it.
It’s not just one company. AMD and Broadcom both dropped dramatically.
Markets are waking up and realizing that the dominance of US semiconductors can no longer simply be assumed.
It is possible that the ban, which was intended to slow down Chinese development has done just the opposite.
Huawei is now the preferred supplier of Chinese data centres and AI laboratories.
Beijing can build off the 910C. The 910C is not the most advanced, but Beijing has it.
Click here to read more about Does China already lead the AI race in terms of technology?
Does this only concern tech?
No. What this tells us about the market’s confidence is more important. Investors don’t just react to earnings or trade bans.
The players are responding to the growing feeling that game rules have become unstable.
Last week President Trump threatened that he would fire Fed chair Jerome Powell. On social media, he publicly accused him of “slowing down the economy”.
It’s not easy to remove the Fed chairman legally. Even the threat is a sign that markets are resisting something they have been for a long time: the politicization monetary policy.
A scenario like this would have a catastrophic effect on the US economy.
Modern market stability is based on the independence of central banks.
By undermining the IMF, it is sending a signal to investors around the world that America may not be as reliable a steward for capital.
Real risks
Recent selloffs are not solely about fundamentals. Earnings are still being reported by companies, many of which have exceeded expectations.
Markets don’t only trade profits. Predictability is the key to their trading.
Bond market reaction has been less than expected. Bonds tend to rise when stock prices fall. The 10-year Treasury yields increased to 4,4% this time.
The US Dollar dropped to the lowest level it has been in over three years.
The story is no longer about tariffs. Randomness is the greater concern. Investors are tolerant of bad policy.
They cannot tolerate policies which change over night.
Trump seems to want the Fed to lower rates and force their hand. The President has made similar remarks in both 2018 and 2019.
This may give a boost to US stocks and riskier assets, but it is unlikely to be the big comeback that many were hoping for.
Where does the money go?
Gold has become the new safe haven for investors as stocks are falling and bond hedges fail to protect.
Gold futures reached a new record high on Monday. VIX (the market’s index of volatility) remains high. This isn’t panic-selling. This is a new positioning.
The American Association of Individual Investors reported pessimism over 50% for eight weeks in a row, the longest period since 1987 when the group began collecting data.
Investors are not waiting any longer for clarification. Investors have already made their decision. In many cases they are moving capital out of the US.
The markets have experienced recessions in the past. Markets have seen wars, downgraded earnings, and even failed banks. They struggle to control chaos.
The question then is not whether or not the US economy remains strong. Investors should ask themselves if they still feel that the US economy is a good place to invest their money. Right now they are starting to reject the idea.
The post US Market Confidence is Cracking: What are the Real Risks Behind the Selloff? This post may change as the updates unfold
