Earlier this week, the S&P 500 made new 2022 lows, but a rally on Wednesday put investors’ fears at ease. Unfortunately, those gains couldn’t last more than a day, with the index making new 2022 lows on Thursday. So, why are stocks down today?
There are a number of reasons, and many of them don’t actually have to do with stocks at the moment. The main reason for today’s losses can be traced back to England. Overnight, there was some discussion about England narrowly avoiding what some have called a “Lehman moment.”
“Lehman” refers to Lehman Brothers, which was one of the first dominos to fall in the financial crisis back in 2008. Instead of being tied to the U.S. real estate market — like the financial crisis was — the concern is now being tied back to England.
Why Are Stocks Down to Today? Will They Rally?
Of course, those comments are not the only reason the Nasdaq is down 3.7% and the S&P 500 is down nearly 3%. Instead, it’s a basket of negatives and ongoing concerns.
The first word that comes to mind right now is “disjointed.” There is a large disconnect in various markets that do not usually see this much volatility. Specifically, that’s the currency markets and the bond markets.
Bonds are suffering one of the worst annual performances on record, while many currencies are hitting multi-decade or all-time lows against the dollar. That’s as the dollar index is up almost 20% so far on the year.
That type of volatility has investors concerned that something could break. In other words, a looming Lehman moment — they just don’t know where the cracks will show up.
It also has investors fretting one other main question: If England is having this sort of crisis below the surface, what other countries — particularly those with worse financials — could be facing a crisis of their own?
As it pertains to today, it doesn’t help that bonds are trading lower. It also doesn’t help that the third quarter ends tomorrow and that, seasonally speaking, we’re in the worst stretch of the year for equities. Lastly, market leader Apple (NASDAQ:AAPL) is down about 5% on the day. That comes after yesterday’s impressive rebound following a bearish iPhone report and a downgrade from Bank of America this morning.
The Bottom Line
Put it all together and stocks still face many issues.
For one, bonds remain in a downtrend while the dollar index remains in an uptrend. Generally speaking, this is a negative for equities.
Second, the Fed continues to raise rates and has taken a “higher for longer” approach. It plans to raise into year-end and hold steady — even if that puts us into a recession.
We have unprecedented declines in bonds and immense volatility in currencies. For instance, the British pound fell 8% from Thursday’s close to Monday’s low and has now rallied 7% from Monday’s low. Currencies should not be moving like that. Plus, it will be a drag on multinational earnings.
On top of all of these moving parts — and the fear that something bigger is brewing — there’s the global economy on the cusp of a recession and persistently high inflation we just can’t seem to quell. All of that has equities under continuous pressure, even though the market has already pulled back quite a bit.
What can change the situation? Lower inflation and an easing dollar would go a long way into calming down the markets. And obviously, we must avoid some sort of unknown financial crisis as well.
On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
