Stocks sank last week. Monday, 5th August, was not pretty either, with the S&P 500 index sinking 800 points or 3% in just a single trading day. Here are three reasons why.
Interest rate disappointment
As anticipated, the Federal Reserve cut interest rates by 25 basis points at its July policy meeting. However, Fed chairman, Jerome Powell said that investors should not expect it to be the start of a long cycle of rate cutting.
This perhaps disappointed investors who have been shifting money towards stocks in anticipation of a series of rate cuts.
On Wednesday 31 July, after the Fed made its announcement, the S&P 500, Dow Jones Industrial Average and the Nasdaq composite all fell, which suggests that the market could have overreacted to Mr. Powell’s comments.
Trump slaps more tariffs on China
On Friday, the 28th of July, Trump announced that the US would impose 10% tariffs on the remainder of US$300 billion worth of Chinese imports starting from September 1.
The trade war is expected to take a few percentage points off of global economic growth. Worryingly, neither party seems willing to back down. Analysts have warned that the trade war has reached a level of seriousness that will be difficult to reverse.
The recently-announced tariffs are on top of the US$250 billion worth of Chinese imports that already have a 25% tariff.
China devalues its currency
In response to Trump’s 10% tariff, China let its currency weakened 1.4% to below the one-to-seven dollar level for the first time in more than a decade.
This prompted the US to label China a “currency manipulator” saying that China’s actions have violated its commitment to refrain from competitive devaluation of its currency as part of the Group of 20 industrialised countries. The devaluing of the Chinese currency knocked US dollars sharply lower and sent gold prices soaring to a six-year high.
China also said that it will suspend its purchase of US farm products.
The Foolish bottom line
It has certainly been a tumultuous month for stocks. The escalating trade war and the lower possibility of sustained interest rates are possible reasons why investors have been scared off the stock market.
However, long-term investors who are looking for bargains may be licking their lips in anticipation. The broad-based stock market decline may throw up opportunities to pick up fundamentally sound companies on the cheap.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia does not own shares in any of the companies mentioned.