By Graham Summers, MBA | Chief Market Strategist
Stocks are selling off violently this morning.
You should NOT be alarmed by this. There are three primary reasons for this sell-off is occurring. None of them are true “game changers” indicating that the bull market in stocks is over.
Those three reasons are:
Reason #1: There was a brief “tariff war” between the United States and Colombia over the latter initially refusing to accept planes returning illegal immigrants from the former.
Despite this issue being resolved rapidly (Colombia buckled), this situation introduced a degree of policy uncertainty and/ or fears of tariffs being introduced in a flippant fashion. The markets don’t like uncertainty, especially for policies that can hurt global trade or the economy.
Reason #2: Japan’s central bank, the Bank of Japan (BoJ), has raised rated for the third time since 2007.
Japan’s currency, the Yen, funds a massive carry trade (a process through which investors borrow in one currency with a low interest rate to invest in higher returning assets). The BoJ raising rates threatens this carry trade which is believed to be worth tens if not hundreds of billions of dollars in size.
To “cover” a carry trade, an investor needs to sell the higher returning asset (in this case, stocks) and return the borrowed money. A similar situation unfolded in August 2024 when the BoJ raised rates and stocks sold off aggressively.
Reason #3 : A Chinese company Deep Seek, claims it has created an artificial intelligence (AI) software that is as good, if not better than comparable technology in the U.S.. The significance of this development is that Deep Seek claims it was able to do this for a fraction of the cost.
This claim is absurd, but the markets appear to be taking it seriously with shared of the tech firms involved in the A.I. buildout in the U.S. (Nvidia, Meta, Apple, etc.) down 5% or more this morning. Here again, this issue introduces uncertainty (in this case uncertainty as to whether U.S. tech firms are overspending on their AI buildouts) and the markets don’t like uncertainty.
As a result of these issues, the markets are a sea of red today, with the S&P 500 down 2.3% and the tech-centric NASDAQ down 4%.
The reality is that none of the above issues is likely to end the bull market in stocks. However, combined, they are creating a volatile situation that appears to have “come out of nowhere.”
Do NOT panic.
Corrections of 5% or even 10% are a regular feature of bull markets. The fact that the S&P 500 managed to pass through 2024 without single 10% correction does NOT mean that we’ve entered a new period for stocks that is without downside risk
So where will this drop end?
The S&P 500 left three separate gaps during its sharp 300-point rally that occurred over the course of just five trading sessions during the week of January 13th. It would not be unusual for at least one if not two of these to be “filled” during a back-test of this recent rally.
Why are we not panicking?
The macro picture for stocks has not changed. The economy is growing. The Fed is easing. And the President of the U.S., Donald Trump, is a stock market cheerleader. The big picture hasn’t changed for stocks. What has changed is a higher degree of uncertainty has appeared in the markets.
At Phoenix Capital Research, we view this correction as an opportunity, NOT the start of a market crash or bear market.
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Best Regards
Graham Summers, MBA
Chief Market Strategist
Phoenix Capital Research
