Stocks sold off violently yesterday morning.
There were three primary reasons for this. By quick way of review, those reasons were:
Reason #1: There was a brief “tariff war” between the United States and Colombia. The issue was resolved rapidly, but it introduced a degree of policy uncertainty and/ or fears of tariffs being introduced in a flippant fashion. The markets don’t like uncertainty.
Reason #2 : A Chinese company Deep Seek, claimed it has created an artificial intelligence (AI) software that is as good, if not better than comparable technology in the U.S. for a fraction of the cost. However, this information has been public since November, so it’s not clear why the markets would suddenly care now as opposed to any other point in the last two months.
Reason #3: Japan’s central bank, the Bank of Japan (BoJ), raised rated for the third time since 2007, thereby blowing up its carry trade (again).
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). To “cover” a carry trade, an investor needs to sell the higher returning asset (in this case, stocks) and return the borrowed money.
Of the above issues, #3 is the most important one for risk assets. Indeed, a similar situation unfolded in August 2024 when the BoJ raised rates and stocks sold off aggressively, plunging 9% in the span of two weeks.
It’s worth noting that stocks bounced back from that situation rapidly, undoing ALL of the losses in a little over a week.
We expect a similar snapback rally this time around as well.
Remember, fundamentally nothing has changed in the macro environment. 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
