The S&P 500 index experienced a 2.6% decline over the past two days, testing the 5,523 level on July 18. This correction erased gains from the previous two weeks but saw decent buying activity in the last trading hours after chipmaker Taiwan Semiconductor Manufacturing Company (TSM) reported earnings above market consensus.
Investor morale was negatively affected, which partially explains why Bitcoin (BTC) and Ether (ETH) traded down on July 18. Understanding the reasons behind the US stock market decline is essential to determine whether cryptocurrencies should sustain a positive correlation.
Rising jobless claims and economic concerns
Fear of rising inflation due to unsustainable government debt might present a short-term negative impact but it also opens an opportunity as investors seek alternative scarce assets. However, if investors feel that the economy is worsening, especially in the job market, traders are likely to seek protection in cash and short-term government bonds.
On July 18, the US Department of Labor reported that continuing jobless claims increased to a seasonally adjusted 1.867 million during the week ending July 6, the highest level since November 2021.
This metric focuses on the number of people receiving benefits after an initial week of aid, thus serving as a proxy for hiring. This data is especially negative for the real estate market, which in turn puts the financial sector at risk.
Federal Reserve chair Jerome Powell told the US Senate Banking Committee on July 9 that the commercial real estate sector poses major risks, especially for small banks with concentrated exposure, according to CRE Daily. Powell stressed the importance of banks honestly assessing and managing their risks, as the commercial sector’s challenges are expected to persist for years due to hybrid work.
Additionally, minutes from the June FOMC meeting revealed that credit quality deteriorated further in April and May, especially in the office, hotel, and retail sectors, with rising overdue delinquency rates. This scenario partially explains the weakness in the banking sector on July 18, with JP Morgan (JPM) trading down 3.2%, Wells Fargo (WFC) down 2.8%, and Bank of America (BAC) declining 2%.
Possible tech export restrictions impact on markets
Meanwhile, US-listed tech stocks were negatively impacted after Bloomberg reported that the US is analyzing rules to control the exports of American technology, a lynchpin to artificial intelligence. Although focused on curbing China’s edge in chipmaking processes, such a move would curb billions of dollars in sales for these companies. Shares of Advanced Micro Devices (AMD) traded down 3.1%, while ASML Holding (ASML) declined 2%.
Jim Covello, head of equity research at Goldman Sachs, issued a warning that the artificial intelligence (AI) investment frenzy may lead to an economic bubble, as reported by Bloomberg. Covello notes that AI investments have yielded modest returns, with Microsoft, Google, and Amazon attributing only 7% of cloud service sales growth to AI. Yet, Covello doesn’t see this happening soon, as ongoing investments keep driving stocks like Nvidia.
David Bahnsen, founder and chief investment officer at the Bahnsen Group, echoes this caution, avoiding large tech stocks, fearing a repeat of the dot-com bust, and anticipating significant investor losses if they don’t divest in time. Bloomberg cites a survey conducted by Lucidworks, which shows that less than half of the companies investing in AI have yet to see a significant return.
Such analysis justifies the 2.5% decline in Amazon's (AMZN) stock and 2.2% in Google (GOOGL) and Apple's (AAPL) stock, which in turn spread pessimistic sentiment to other markets, including cryptocurrencies.