47. The Recipe for a Market Sell-Off: Carry Trade, SAHM Rule, Recession Fear

Aug 9, 2024

The recent stock market turmoil is explored, analyzing whether it signifies a pullback, correction, or bear market. Insights into the Carry Trade's role in the sell-off highlight its impact on tech stocks. They discuss the Sahm Rule as a recession indicator, shedding light on unemployment signals. Historical recovery rates reveal that corrections are common and often short-lived. The emotional responses of investors during market panic are also examined, with a call for data-driven decision-making over fear.

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INSIGHT

What Counts As A Market Drop

Market declines are measured: pullback (5–9%), correction (10–19%), bear market (≥20%).
Since the 1980s, >5% S&P drawdowns happen almost every year and recover quickly on average.

ADVICE

Avoid Panic Selling; Buy With Homework

Don't panic-sell during turbulence; think long-term and avoid emotional decisions.
Consider buying stocks you researched if prices dip and your homework supports the move.

INSIGHT

How The Carry Trade Amplified Selling

The carry trade amplified the sell-off when traders shorting the yen faced margin calls after the yen strengthened.
Forced selling of tech positions to meet margin requirements pushed prices down fast.

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The stock market has been having quite the week since our last episode on the Fed’s decision to NOT do a rate cut and the resulting effects of the not-so-great unemployment numbers that came out last Friday.

Recipe for disaster?

Is the stock market crashing? Why was there a sell-off and what is a market sell-off? And is this a good time for us self-directed investors to invest more, like, is the stock market on sale?

What were the sell-off ingredients?

The Carry Trade (Yen Got Stronger)

The Sahm Rule (Recession Indicators)

Recession FEAR (Emotional Investors)

Sell-Off Decline: Pull-Back, Correction, Bear Market?

We all know that the stock market recently tanked and there was a huge sell-off. Was this a pull back or a correction, are we in a bear market.

The difference is a decline of:

Pull back = 5-9%

Correction = 10 -19% (Stock Market Is Currently Here)

Bear market = >20%

✨The recent turbulence was the most severe since the 34% decline that occurred in Q1 2020.

✨ Market corrections happen almost every year. Since the early 1980s, there's been a greater than 5% drawdown in the S&P 500 Index in every year but two (1995 and 2017).

✨ The stock market has historically recovered quickly from corrections. The average time to recovery from a 5%-10% downturn is three months. The average time to recovery from a 10%-20% correction is eight months.

✨80% of corrections since 1974 have not led to a bear market.

✨ There's a 73% probability of a double rate cute (.50%)

How do we know we are in a recession?

Great Analogy: https://www.tiktok.com/t/ZTNgX6jUW/

Related Episodes:

Ep. 46) Fed Update: What is Event Risk? Could it Trigger a Sell-Off?

Ep. 45)

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