On Monday (5 Aug), the S&P faced its worst one-day drop since 2022.

The index plunged 4.52%, dragged lower by the Magnificent Seven stocks (Apple, Netflix, Microsoft, etc.), which tanked by 7-12% on the same day.

The losses in these high-performing stocks wiped out $1 trillion from the global market. From Monday’s lows, the S&P was down nearly 10% from its all-time high of 5,670 points.

Apple led the selloff, as Warren Buffet’s Berkshire Hathaway slashed over 50% of its stake in the iPhone maker due to concerns on the firm’s outlook in the tech industry.

The Malaysian market fared worse.

It took 3 months for the KLCI to hit a 3 year high of 1,639 points, but these gains were all wiped on Monday.

The benchmark index slumped by 4.63%, tracking its steepest one-day sell off since the March 2020 pandemic crash.

The widespread selling was helmed by major stocks such as:

• Maybank (lost its RM10 support and fell to RM9.80).

• YTL (dropped 13% in a single day to RM2.93).

• Tenaga (fell to a 2-month low of RM13.46).

Though most of the stocks have made a strong comeback since then, this serves as a reminder of how quickly and unexpectedly downturns can occur.

Bitcoin was not spared.

Hailed as an asset for its negative correlation to the equity market, the flagship cryptocurrency fell 19.72% to a 6-month low of $49,000 before rebounding to $61,000.

This huge swing liquidated $361 million of leveraged positions, both long and short.

Why is this happening?

The global stock market turmoil came from the weak reports on US manufacturing and construction, heightening fears that the world’s leading economy may be entering a recession.

During a recession, businesses often cut jobs or close, leading to higher unemployment. Consumers reduce spending, investments fall, and savings diminish, creating a cycle of financial instability.

To prevent this from happening, analysts have been expecting rate cuts from the Federal Reserve in September, which will make borrowing costs cheaper to encourage spending and boost the economy.

But Wall Street is worried that it may be too late and expects the Fed to cut more aggressively.

48.5% of investors believe that the committee will slash rates by 50 basis points instead of 25.

Other catalysts for the sell off include a weaker than expected monthly jobs report, overvaluation in the tech industry, and worries of the Israel-Hamas war spiking global oil prices.

Carry Trade: Another major reason for market volatility.

Put simply, a carry trade is when investors borrow money from a place with low interest rates and use it to invest in assets that generate a higher return.

In the past four years, global central banks rushed to raise interest rates to multi-decade highs to curb inflation, but Japan was the only country keeping them ultra-low.

As such, the yen carry trade became extremely popular. Borrowing it for almost nothing and getting a 5-6% return on US Treasury and bonds was a no-brainer.

An investor could borrow the Japanese yen for a small fee and use it to buy US bonds or even invest in the S&P - both of which have offered solid returns in recent years.

This is a form of leverage and is risky, but as long as the yen remains weak against the US dollar, you could pay back the loan and walk away with a handsome profit from currency exchange and market movements.

When “cheap” money turns expensive

Problems emerged when the yen’s value surged over the past few weeks, as the Bank of Japan raised interest rates two times since March.

Meanwhile, the dollar weakened when the Federal Reserve hinted strongly that rate cuts are likely to occur in September.

The jump in the yen’s value eroded the profits made by the carry trade, and higher interest rates made borrowing and repaying the yen more expensive.

Minor losses started to accrue, and lenders began demanding investors more cash to cover those losses, better known as a margin call.

As a result, those that were heavily leveraged had to sell their stocks to raise cash or close out their positions entirely.

The bloodbath in the market followed.

But markets have made a comeback..?

Stocks rebounded strongly on Thursday following the steep sell-off earlier in the week, as positive labor market data boosted investor confidence in the US economy.

According to CNBC, the S&P 500 rose 2.3%, closing at 5,319.31, marking its best performance since November 2022.

Meanwhile, the FBMKLCI rose 3.90%, while Bitcoin jumped 12.77% to $61,000.

The recent movements show just how volatile the market can be. Those who sold off during the crash, fearing that the U.S. was heading into a recession, were caught off guard by the market's swift recovery.

Whether you’re trading or investing, it's crucial to have a strategy.

For traders: Set your stop losses and stick to them. Avoid emotional decisions during market swings.

For investors: Allocate a specific percentage to each asset in your portfolio. If any asset becomes underweight or overweight, rebalance it to maintain your desired risk level and long-term goals.

If you’re underexposed, the key is to always get a little exposure first, then rebalance it accordingly.

Learn more about how to build your portfolio by listening to our recent podcast with financial experts Hann and Sani here.

What are the pros doing?

Warren Buffet is in a huge pile of cash right now.

According to estimates, Berkshire Hathaway’s cash on hand hit a record high of $276.9 billion, up from $189 billion the prior quarter.

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That’s all for this week’s newsletter!

Disclaimer: The information contained in this newsletter is for informational and educational purposes only. Nothing herein shall be construed to be financial, legal, or tax advice.