How to Read Last Week's Market Crash

The glitch in the matrix

Thanks for reading Finessing Finance. As always, your support is not unrecognized on my journey to help people with free, accessible personal finance content.

---

Photo by Jan Baborák on Unsplash

A Glitch in the Matrix

Last Monday’s stock market crash made headlines this past week.

Here’s what happened this past week in a nutshell:

• Japan’s Nikkei Index incurred the biggest drop since 1987

• The S&P 500 fell by over -7% since the August high

• The NASDAQ dropped by over -10%

Does this mean to cash out? Should you take your money and run?

Absolutely not. We’re in it for the long run.

It’s important to understand what’s causing these market corrections and how can move forward.

What Caused the Selloff?

While we can’t narrow in on the specific cause of Monday’s selloff. There are a variety of factors at play.

Like dirty laundry, a combination of sweaty clothes joined together in your hamper to make a big stink that smells like a recession.

1. The Fed has yet to cut Interest Rates

   1. Remember inflation? When the Federal Reserve doesn't cut interest rates in a fight to battle inflation, borrowing costs remain high, leading to reduced consumer spending and business investment, which can slow economic growth. This can trigger a recession, as tighter financial conditions and reduced confidence further dampen economic activity.

   2. Remember the latest labor data points? You would have if I updated this blog more often. But to catch you up to speed, last month’s labor report was less than stellar. Non-farm payrolls were down by 36% from the previous month. What’s troublesome is that this latest data triggered something called the Sahm rule which is a recession indicator. Maybe we’ll touch on that in the future.

   3. Japan Carry Trade

      1. Japan’s situation helped fuel the selloff. We’re not pointing fingers but let’s explore what the Japan carry trade is. If you’re tired of hearing about your friends going to Japan this year, it’s important to note that the Japanese Yen has been falling in value year-to-date.

      2. The Japan carry trade is like borrowing money at a very low interest rate in Japan (where "money is cheap") and then using that money to invest in another country where you can earn a higher return (where "money grows faster"). The profit comes from the difference between the low borrowing cost and the higher returns.

      3. The game changed for traders this past week when Japanese banks announced increasing their interest rates.

The Best Way to Hedge Against A Stock Market Crash

I once asked a financial manager, what can I do about a stock market crash over Zoom during the pandemic. They replied, “Nothing.”

It’s not all doom and gloom though.

To hedge against a stock market crash, you can:

1. Diversify: Spread investments across different asset classes and global markets.

2. Use Put Options: Buy put options to protect against declines.

3. Invest in Inverse ETFs: These funds rise when the market falls.

4. Consider Volatility Products: VIX options and ETFs can increase during market turmoil.

5. Hold Precious Metals: Gold and other metals often perform well in downturns.

6. Invest in Bonds: U.S. Treasuries and municipal bonds offer safety.

7. Keep Cash: Holding cash allows you to buy assets at lower prices.

8. Explore Alternatives: Real estate, private equity, and hedge funds may offer uncorrelated returns.

9. Use Stop-Loss Orders: Automatically sell stocks if they fall to a certain price.

10. Reduce High-Risk Exposure: Sell overvalued stocks and regularly rebalance your portfolio.

Have a great week,

Jordan