Why the global financial markets are selling off
Welcome to Cautious Optimism, a newsletter on tech, business, and power. Modestly upbeat.
I am on vacation this week. In light of that fact, CO had planned to slow down, get short, and generally detour to topics that were less financial and more fun. Then Friday’s selloff continued over the weekend, the stock market got torched this morning, and everyone is worried about a recession. So here we are.
Consider the following a special, focused edition of your newsletter.
📈 Trending Up: Fear
📉 Trending Down: Your net worth
Panic! At the stock market
Questions that arose as last week closed, asking if the Fed had waited too long to cut rates, have an answer this morning. And the answer is not no. Here’s the tape:
Thursday: Fed meeting, no rate cut, lots of chat about when it will cut and what data it is weighing.
DJIA close: 40,347 (-1.2%)
Naz100 close: 19,023 (-2.5%)
Friday: More lackluster economic data arrives, ratcheting concerns about domestic economic stability even higher:
DJIA close: 39,737 (-1.5%)
Naz100 close: 18,556 (-2.5%)
The weekend:
Bitcoin began the weekend at $61,900
Ether began the weekend at $3,165
As Sunday ended, bitcoin was worth $57,895 (-6.5%)
As Sunday ended, ether was worth $2,342 (-26%)
Monday morning:
DJIA pre-market: 38,974 (-2.3%)
Naz100 pre-market: 17,635 (-5%)
Bitcoin: $51,370 (-11.3% from EoSunday)
Ether: $2,290 (-2.2% from EoSunday)
The Bessemer cloud index sold off 3.1% on Friday and is off another 2.8% in pre-market trading. There’s a lot else going on:
Japanese rates rose last week, helping the Yen rip higher against the dollar. A lot of trades were riding on the Yen staying weak, potentially leading to panic selling and covering.
Shares in Japanese, South Korean, and Taiwanese stocks got trashed today. Europe, too. “Markets are in a meltdown and there’s a lot of panic selling now,” Capital.Com analyst Kyle Rodda told Bloomberg.
Global tensions in the Middle East (Israel, Iran, Yemen), Europe (Ukraine), and Asia (Bangladesh, Taiwan, China, Philippines) are rising.
But the real elephant bear in the room is the potential of a recession in the United States. The Sahm rule — when three-month unemployment rises 0.5% “relative to the minimum of the three-month averages from the previous 12 months” — triggering last week has people very, very worried about a recession here in the States. And with good reason; the rule is historically prescient.
Looking back, there was a period of time when rates were high, inflation cooling, and employment data seemingly sturdy enough to last until the U.S. central bank deigned to loosen monetary policy. Instead, the labor market broke before the Fed felt safe enough about inflation to cut rates, potentially bolstering economic activity.
Are we in for a hard landing? That’s not clear. But dreams of a soft landing so smooth that we did not even notice the touch-down appear kaput.
Instead of optimism, we’re now in a market of fear. Greed is being hot-swapped for concern, which means a flight to safety. Treasury rates are falling, for example.
Yeah, but what does all that mean for tech?
It’s pretty bad.
Tech companies have dealt with quarters and quarters of customer caution. That reserve showed up in falling gross and net retention rates at SaaS companies, slowing cloud infra sales growth, and muted public-market multiples for many tech shops.
AI changed the game for a bit. Hope that genAI would quickly usher in productivity gains, new software platforms of note, and bolster upstart tech companies’ growth rates rode high. Nvidia became the most valuable company in the world for a minute; AI-focused startups raised huge sums; Amazon, Microsoft, Alphabet, and Meta pushed their capex pace into the stratosphere. It felt like a land grab.
But even before the economic data went sour and markets began to puke down their own shirts, concern was rising that AI-driven growth in the tech sector might not meet expectations; that anticipated productivity gains might be further out in the future; that AI models depreciated too quickly; the list of worries was not short.
The timing is poor. For tech more generally, we’re seeing market sentiment collapse as AI hype is at a comparatively low ebb. That means that tech companies could be staring at a selloff and potential recession without a secular safety net.
Of course, rate cuts will be welcome, but rate cuts in a recession are worth less to markets in price terms than rate cuts to head off a recession. And now with recession concerns rising, it’s all a bit shit.
Looking ahead
The IPO window is now closed. No one wants to list into a downturn.
All startup M&A prices just took a hit. No one wants to optimistically overpay for an asset in a downturn.
Venture capital investment will slow, though the data will take a few months to show up, given the lag between venture rounds closing and being announced.
Startups with both attractive growth rates and limited burn rates will be hot tickets. Startups with impressive growth rates and 2021-era burn rates will have to tighten up their belts, and quickly.
Software multiples will not improve for some time, so SaaS will stay in the penalty box for now.
It will be harder for AI model companies to raise their next few billion dollars than they expected.
Your 401k just took a massive hit.
But, hey, friends, at least we all get to buy index funds at depressed prices for a while. Right? Right?
I am off to take the tot swimming. Hugs, good luck, and chat tomorrow. — Alex
BTFD