Recession Jitters: "Buy the Dip" Fails as Market Plunges?

The illusion of easy gains in the US stock market appears to be shattering.

Fueled by escalating anxieties over a potential US economic recession, Monday witnessed a "Black Monday" sell-off across US equities. By market close, the Dow Jones Industrial Average had slumped by an initial 2%, the S&P 500 Index tumbled 2.7%, and the tech-heavy Nasdaq Composite plummeted 4%.  Individual stocks mirrored the broader market downturn, with Tesla (TSLA.O) collapsing 15.4%, Apple (AAPL.O) nearing a 5% decline, and Nvidia (NVDA.O) also shedding 5%.

The cryptocurrency market mirrored the equity rout. Bitcoin (BTC) breached the $80,000 mark for the second time in three weeks, hitting a low of $77,400 within a 24-hour period. Ethereum (ETH) retraced to around $1,800, and the total cryptocurrency market capitalization contracted by nearly 4%.

Arthur Hayes, co-founder of BitMEX and a prominent figure in the crypto space, appears to be vindicated in his earlier predictions. His forecast of Bitcoin potentially falling to $75,000 is gaining traction as market sentiment deteriorates.

In his latest tweet, Hayes reiterated his warning of a further Bitcoin decline towards $75,000, cautioning that "violent" market swings are likely if this level is reached. He pointed to "red flashing lights" in options open interest around the $75,000 mark, signaling extreme bearish sentiment.

Trump's Words Trigger Market Slide as US Recession Shadow Looms

Scott Bessent, US Treasury Secretary, sparked market unease on Friday during a CNBC interview, suggesting the US economy might undergo a "detox period" as the new administration scales back government spending.

President Trump himself further fueled recessionary fears in a Fox News interview aired Sunday, acknowledging that the economy is in a "transition period."

"I have to build a strong country, you can't just look at the stock market," Trump stated, prioritizing broader economic goals over immediate market performance.

Goldman Sachs recently exacerbated market pessimism by significantly lowering economic growth forecasts, citing the potential impact of tariffs. Adding to the gloom, data from the New York Federal Reserve indicated a rise in inflation expectations, with the February 1-year inflation forecast climbing to 3.13%. The New York Fed also reported that expectations for worsening financial conditions in the coming year are at their highest since November 2023.

Sam Stovall, chief investment strategist at CFRA Research, told CNBC, "We are in the throes of a manufactured adjustment, and I say manufactured because it really is in response to the new administration's tariff plans, or at least tariff threats, and what impact that will have on the economy.”

Institutional analysis suggests that if recession fears stemming from trade wars materialize, the Federal Reserve might initiate a series of rapid interest rate cuts as early as June. Futures markets are increasingly pricing in 25 basis point rate cuts in June, July, and October. This trend accelerated following President Trump's "transition period" remarks regarding tariffs, triggering a sell-off in US stocks and a decline in Treasury yields on Monday as recession anxieties mounted.

Tim Duy, chief US economist at SGH Macro Advisors, cautioned that the Federal Reserve faces a double bind if labor or financial markets falter. The Fed would be caught between combating inflation and resisting pressure from the Trump administration to cut rates.  However, whether rate cuts can restore market confidence remains uncertain.

Analysts: Bitcoin "Mini-Recession" Needed Before Rebound

Institutional investors are pulling back from the crypto market, with cryptocurrency investment products experiencing net outflows for the fourth consecutive week. According to CoinShares data, crypto funds saw outflows of $867 million last week, bringing total outflows over four weeks to a staggering $4.75 billion. The majority of bearish sentiment originates from the US, with American investors withdrawing $922 million last week.

Zach Burks, CEO of NFT marketplace Mintology, suggests Bitcoin could plummet to $72,000 amid inflation concerns and waning appeal as a "Trump trade." "Many investors are pulling out of Bitcoin, viewing it as a risky asset class for the first time since Trump took the White House," Burks stated.

Burks argues that Bitcoin's failure to decouple from the stock market has undermined its function as a store of value. Instead, investors are flocking to traditional safe-haven assets like gold. He predicts that while Bitcoin may recover to $110,000 later this year, the market must first endure a "mini-recession" induced by Trump's policies.

Gregory Daco, chief economist at EY-Parthenon, told CNN that the uncertainty and confusion surrounding Trump's policies are detrimental to the overall economic outlook. "What we have right now is policy ambiguity, policy uncertainty, policy goal uncertainty, and all of that combined makes investors uneasy because where policy is ultimately headed, at this point, is unclear," he explained.

Therefore, in such a volatile environment, "Don’t Fight it, Float with It." 

By Mary Liu

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