From The Economist, November 23:
Everyone knows share prices have a long way to fall. Even so, getting out now might be a mistake
Sales of Nvidia’s most advanced chips “are off the charts”, said Jensen Huang on November 19th, while reporting his firm’s highest-ever quarterly revenues. The boss of the world’s most valuable company had much to celebrate. It raked in $57bn in the three months to October, at a gross profit margin of over 70%—the stuff of investors’ dreams. Yet the following day Nvidia’s share price fell by 3%. It is now 13% below its peak in October.Across markets, the mood among shareholders has shifted from bullishness to fatalism. Stocks have been soaring for years, fuelled by hopes that artificial intelligence will supercharge profits—hopes that most professional investors now think have become overly optimistic. In the grand scheme of things, the recent sell-off is eminently bearable. Although the S&P 500 index of big American firms is down by 4% since its peak in October, it is also up by 84% since a trough in 2022. But for stocks to fall when the news is good is a troubling hint that a long bull market might at last be running out of steam. Traders are on edge, and in the coming week will be alert to signs that the sell-off might accelerate.
One red light is already flashing: markets seem unusually uncertain of how to interpret new developments. The morning after Nvidia’s earnings report, for instance, the firm’s share price leapt by nearly 5%—and the S&P 500 and the NASDAQ, a tech-heavy index, jumped, too—before all three began to slide and closed in the red. Meanwhile, the VIX, which measures the range in which traders expect the S&P 500 to move and is otherwise known as Wall Street’s “fear gauge”, was all over the place. A reading of 20 means that in a year’s time traders think it likely the share-price index will be somewhere between 20% above and 20% below its current level. In normal times, this estimate varies by no more than a percentage point or two from day to day. On November 20th it swung from 19 to 28 in under three hours. Investors, in other words, are no longer confident that even barnstorming results like Nvidia’s can keep pushing share prices higher, since valuations have risen so far already.
Another warning sign would be for investors’ usual boltholes to become unreliable. True, lately the dollar has resumed its role as a haven and risen in value (unlike in April after President Donald Trump’s “Liberation Day”, when it plunged along with stocks). But the price of gold, a traditional hedge against volatility, peaked in October and has fallen by 7% since, barely budging during last week’s ructions. Gold has spent recent years on its own blistering bull run, with its October peak marking an all-time high and raising worries that the precious metal is itself in a bubble. If investors in supposedly riskier assets cannot rely on gold to hedge their losses, the next crash will be painful indeed.
The third bad omen would be for “normal” correlations between different assets’ prices to break down. Just now, Japan is the focus of such worries. Its currency, another erstwhile haven, sold off amid the past week’s turbulence, even as Asian share prices also fell and Japan’s borrowing costs rose. The ten-year yield on Japanese government bonds hit 1.8% on November 20th, its highest since 2008; the 30-year yield reached 3.4%, its highest ever. This is exactly the dynamic, reminiscent of emerging markets, that panicked investors when exhibited by America’s currency, shares and Treasury bonds in the spring. Should it continue—or worse, spread to other markets—traders will start panicking again....
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