The stock market didn't just fall out of a coconut tree
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Illustration: Sarah Grillo/Axios
For someone who just fell out of a coconut tree, Monday's stock market moves would be nothing to care very much about.
Why it matters: Stocks exist in the context of all in which we live and what came before.
The big picture: Whether you think the stock market is telling a tale of boom or gloom depends mostly on whether you're looking at its level or at its direction.
Follow the money: Nvidia is the best example. Its level — a market value of $2.4 trillion, a dividend yield of 0.04%, a PE ratio of 58 — bespeaks a market of astonishing optimism, pricing in breakneck future growth.
- Nvidia's price action, by contrast — a fall of more than 26% in just over three weeks, and the loss of some $900 billion in market value — looks like the bursting of a bubble, the death of a dream.
By the numbers: The value of the Japanese yen, which closed on Monday at 144 yen to the dollar, is similar. It's very weak if you go by where it has traded for most of this century — at the beginning of 2012, there were only 76 yen to the dollar.
- Compared to where the currency traded last month, however, when a dollar could buy more than 160 yen, there has been an incredibly abrupt strengthening.
Between the lines: While the stock market's gyrations on Monday were large, they weren't huge. The S&P 500 closed down 3% on the day, which is the kind of move traders expect to see every few months.
- In context, however, the move has become freighted with fears that the market is pricing in a recession just as we enter the heat of election season.
Where it stands: Trying to time the market is never a good idea, but it's clear that the market that matters most — the Fed funds overnight interest rate — is approaching a key inflection point. It will fall in September for the first time since the pandemic chaos of March 2020.
- That's going to mark the beginning of a rate-cutting cycle. If the futures markets are to be believed, there's a 73% chance that by this time next year, rates will be at least 2 full points below where they are now. That's eight regular-sized rate cuts, all of which should help provide some kind of a tailwind to the economy.
The bottom line: If you fell asleep in May and woke up today, the biggest market change you'd see would be a significant drop in mortgage rates. That's not exactly a bad thing.
