Time To Sell?

The proverbial sh*t hit the fan in global markets over the last few days. In this article, I delve into why and whether or not it might be time to sell.

What Happened?

In summary,

On August 2nd, some startling statistics came out of the US, which appear to have triggered a significant panic in global markets.

In the last 3 days, the S&P500 has fallen by 3.7%, NASDAQ 5.3%, bitcoin by 15%, ethereum by 26% and Solana by 22%

With markets currently closed in the US, stocks may fall further when they open Monday morning.

What Data Caused This Panic?

Whilst I wouldn't say this is the only reason, there are 3 key statistics that I believe had contributed to this recent panic in global markets.

1. Unemployment
2. Purchasing Managers Index (PMI)
3. US Dollar Index (USDX)

Below I'll quickly summarise what these are and why they matter.

1. Unemployment

The unemployment rate rose to 4.3%, which is 0.8% higher than a year earlier. For context, that's 7.3m Americans who are looking for work but unable to find it. This number does not include those who are unemployed and not looking for jobs.

Why It Matters

Whilst unemployment isn't abnormally high, the rate at which it has increased triggers an indicator known as the 'Sahm rule' which is where unemployment increases by more than 0.5% over a 12 month period. Historically, when the rate of unemployment has increased at this rate or faster, it has been a highly reliable indicator of economic recessions.

2. Purchasing Manager's Index (PMI)

The PMI is a survey used to assess the purchasing activity across the business supply chain. A score of 50 represents no change month to month, above 50 = growth, below 50 = a decline.

Why It Matters

For July, manufacturing PMI declined to 46.8 from 48.5 in June pointing to ongoing contraction in the US economy at an accelerating pace. This leading indicator shows that businesses are buying less raw goods and materials in anticipation of slower business activity. What's more, slow economic activity also tends to lead to more job cuts as cost savings become paramount.

3. US Dollar Index (USDX)

The U.S. dollar index (USDX) is a measure of the value of the U.S. dollar relative to other major international currencies including (EUR), Japanese yen (JPY), Canadian dollar (CAD), British pound (GBP), Swedish krona (SEK), and Swiss franc (CHF).

Why It Matters

July saw a drop of 2.5% in the dollars strength. This means that for US based companies and indices that do business overseas, that's a direct hit to their top line revenues. For example, in Japan, the USD has fallen by 7.5% over the last month, selling an iphone in Japan will now give Apple 7.5% less revenue for each sale. Ouch!

Is Now The Time To Sell?

Based on the above economic indicators, it seems increasingly likely for the US to enter into a recession, though this isn't guaranteed. With US equities worth ~43% of the $115T global equity market, a recession there is likely to have global implications.

So is it time to sell?

I think it really comes down to your time horizon. Personally, I see this as a time to consider taking some profits off the table and keeping some cash aside in case economic conditions do worsen from here.

Long-term, I believe that both the equities and crypto markets (specifically Bitcoin, Ethereum and Solana) will continue to rise, as interest rates are expected to fall and global liquidity increases.

I'm off for a walk now, it's good to remind yourself that the sky isn't literally falling even when the markets are.

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