CNBC's Jim Cramer blamed trading algorithms for Tuesday’s stock-market plunge.
The Dow Jones industrial average’s 800-point tumble on Tuesday "was all about the rise of the machines," Cramer explained on “Mad Money.”
The investment guru said complex algorithmic programs, set up by professional money managers to sell when the odds of future market losses increase, sparked Tuesday’s plunge.
After short-term interest rates traded above long-term rates in a so-called yield curve inversion (interpreted as a recession omen), some algorithms automatically began selling securities because of the rising odds of an economic slowdown, CNBC.com explained.
"Why? Because historically, this situation has produced negative results for the bank stocks and these hedge funds are trying to get out ahead of others who fear those negative results but just don't know they're going to fear them. It's a footrace," he explained. "This curve, as they call it, overrides whatever you hear about good employment or consumer balance sheets or robust lending. It's predictive," Cramer said.
Cramer warned that market bloodshed may not be quite over yet.
"Here's the problem: there are now so many hedge funds using the same algorithm, same programs [that] there simply aren't enough investors willing to take the other side of the trade. If we all know that stocks go down on certain triggers, then who the heck would want to buy stocks?" Cramer said.
“When the percentages are against you and the algorithms are in charge ... nobody wants to try to be a hero and bet against them."
Meanwhile, Bloomberg warned that reading too much into day-to-day moves is usually a mistake and a half dozen explanations exist for Tuesday’s walloping in equities. At the bottom of virtually all of them, however, lurk concerns that the market sees something to suggest the decade-long expansion that has fueled the bull market is in greater jeopardy than economists realize.
“The fundamental data is just not pricing in a robust, exciting, and upwardly sloping market,” Alicia Levine, BNY Mellon Investment Management chief strategist, said on Bloomberg TV. “The bond market is clearly giving a different signal than the equity market has in the last week. And the bond market is concerned about slowing global growth.”
Meanwhile, global stocks tumbled to one-week lows on Wednesday, as declines by long-dated U.S. bond yields and a renewal of trade concerns stoked fears of a downturn in the United States, the world’s largest economy, Reuters explained.
U.S. markets are closed to mark former President George H.W. Bush’s death, but the effect of Wall Street’s turmoil in the previous session, when New York-listed shares tumbled more than 3 percent, was felt in Asia and Europe.
Tuesday’s declines came just a day after an equity surge driven by optimism that China and the United States would sort out their trade dispute. Then President Donald Trump threatened “major tariffs” on Chinese imports if his administration failed to reach an effective trade deal with Beijing.
“As I look into next year, most expectations for further gains have been pared back. Investors have gone from extended bullishness at the start of the year on equities to an uncomfortable neutrality,” said Paul O’Connor, head of multi-asset at Janus Henderson.
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