Monday's stock market plunge: a cold autopsy

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Three businessmen in suits are on a downward spiral, following the trajectory of a red arrow pointing downwards, symbolising the dramatic fall in stock market indices. Their briefcases are flying out of their hands, adding to the sense of loss of control. The blue sky and clouds in the background contrast with the seriousness of the economic situation. The 'Sagora...' logo appears at the top right, adding a touch of visual identity to the image. This image illustrates the fall in the stock markets.

It was on everyone's lips, from seasoned investors to neophytes: on Monday, the stock markets fell spectacularly, sending tremors through the global economy. The picture was bleak: disappointing unemployment figures, the debacle of the Asian stock markets, an Apple abandoned by Warren Buffet, and escalating tensions between Iran and Israel in the background. No global stock market has been spared.

Is this collapse simply a stock market correction or a prelude to disaster? We need to dissect this event, and who better than our dear Aunt Agathe to enlighten us?

Sell in May and come-back in September: a tried and tested maxim?

On Monday 5 August, panic reigned on the markets. At the close, the Nasdaq, the barometer of the technology sector, was down by almost 4 % (driven in particular by a 6.7 % fall in Nvidia, the famous microprocessor company which had briefly overtaken Microsoft in terms of capitalisation). The S&P 500 fell by 3 % and the Dow Jones by 2.6 %. Compared with their July peaks, these indices have fallen by 7 %, 8.5 % and 6 % respectively.

International markets were also affected. Just look at the historic 12.4 % fall in the Nikkei index (Tokyo) and the 2.1 % drop in the CAC 40 (Paris).

Reasons for the market downturn

Disappointing figures: the shadow of an imminent recession

At the root of this debacle was a growing fear of a recession in the United States, fuelled first and foremost by a contraction in the manufacturing purchasing managers' index. The ISM PMI, which assesses the economic conditions of manufacturing companies through a survey of 400 purchasing managers, came in at 46.8, down from 48.8 in July. Below 50, this index signals a contraction. Secondly, July's unemployment figures, published in an employment report, disappointed, coming in at 4.3 1Q3T versus the 4.1 1Q3T expected.

Sweat from the land of the rising sun

The plunge in the Tokyo Stock Exchange also played its part. It was probably the result of the Bank of Japan's (BoJ) surprising rate hike, which caused the yen to rise to its highest level since January after months of freefall. This rise in the yen penalised Japanese export-oriented stocks, explaining the fall in the Nikkei index. What's more, the rise in the yen has hurt those who practice the "carry trade", a strategy that involves borrowing in a low-interest currency (such as the yen) to invest in a high-interest currency. With the increase in key rates, this strategy has become less attractive, as borrowing in yen is now more expensive.

Warren Buffet's butterfly effect

Among the other catalysts for the stock market plunge was the decision by Berkshire Hathaway, Warren Buffet's holding company, to sell almost half of its Apple shares. The decision by the "Sage of Omaha", who is seen as a shrewd investor, shook the markets, prompting other investors to follow suit. At the same time, the escalation of violence in the Middle East added a further dose of volatility to the markets.

Faced with these events, some newspapers have not hesitated to adopt an apocalyptic tone, with headlines such as "Black Monday", "Wall Street gives in to panic" and "Chaos on the markets". To read them, you might think that the end of the financial world is nigh, especially as on Monday the volatility index (VIX), nicknamed the "fear index", shot up like a rabbit, reflecting investors' fears. But should we really be fearing an unprecedented crisis?

The light at the end of the tunnel

Fortunately, since that 'Black Monday', the markets have caught their breath. Our dear Aunt Agathe, always ready to analyse stock market fluctuations, took a step back to examine the weekly performances of our favourite indices. In the end, over the week, the S&P 500 was down just 0.045 %, a mere trifle, while the Dow Jones was down 0.6 % and the Nasdaq 0.18 %. Even Apple, after its difficult break-up with Warren Buffet, was down by just 1.6 % (compared with 5 % on Monday). The Nikkei index is still down 2.5 %, but it has come a long way.

Aunt Agathe's lessons

What lessons can we learn from this story? Aunt Agathe reminds us that stock market crashes are an integral part of market cycles. This is not the first time financial history has seen a crash, and fortunately not all of them have had the same impact as those of 1929 or 2008. Like an exhausted sprinter, the market sometimes needs to catch its breath to get going again. 

Admittedly, in the short term, a decision (such as the Bank of Japan's decision to raise its key interest rates) can cause considerable volatility on the markets, leading to impressive falls. However, this is not the end of the story, in the long term, it is company results that influence the stock market. 

As we pointed out in a previous article, it is almost impossible to predict the markets or to beat them, given their tendency towards the hypothesis of efficient markets (in their semi-strong form). That's why Aunt Agathe reminds us once again: the important thing is not to play sorcerer's apprentice by trying to predict short-term fluctuations, but rather to protect against the risks of volatility by diversifying investments, both in terms of assets and timeframe.

Would you like to navigate the turbulent waters of the financial markets more calmly? Would you like to learn how to cope better with a fall in the stock markets? Don't hesitate to visit our website to discover our training programme in portfolio management !

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