What does the "Black Monday" of the Nasdaq mean?

Core Viewpoints

Three reasons behind "Black Monday": loosening of the tech narrative, tariff shock impacting risk appetite, and concerns about recession triggered by fiscal contraction.

The signal significance of U.S. assets lies not only in the U.S. itself but also reflects global industry and dollar tides. The market's discussion on "Black Monday" focuses on: has the global asset turning point arrived?

We believe that risk assets represented by U.S. stocks have not yet reached a major turning point, because the U.S. has three major cycles—technology, credit, and fiscal cycles. The technology cycle is the most decisive direction, and the current upward trend of the technology cycle has not yet ended. Regardless of whether the recent decline in U.S. Treasury yields will again drive credit recovery, future U.S. tax cuts and other policies may trigger fiscal expansion.

It should be noted that Deepseek implies that China will challenge the U.S. "technological advantage," leading to a systematic re-evaluation of Chinese assets and a downward adjustment of U.S. assets. Looking ahead, risk assets in China and the U.S. may present: (1) opportunities for resonance in risk assets; (2) increased stage-specific asset competition.

Summary

On March 10, Trump stated that "the possibility of a recession in the U.S. this year cannot be ruled out," raising market concerns about an economic downturn. The three major U.S. stock indices plummeted, with technology stocks experiencing particularly severe volatility. The Nasdaq fell 4% in a single day, marking the largest single-day drop of 2023. Major tech stocks collectively declined, with Tesla plummeting over 15%, resulting in a single-day market value evaporation of $130 billion. The market referred to March 10 as "Black Monday" for U.S. stocks.

Is "Black Monday" the beginning of the collapse of U.S. assets? U.S. assets often lead global capital flows; does the massive adjustment of U.S. risk assets mean that global capital flows are beginning to reverse? On a deeper level, where does the global industrial cycle stand?

This is the question the market is eagerly focusing on after "Black Monday."

I. Major Shock to U.S. Assets, Challenge to U.S. "Exceptionalism"

Since the Spring Festival, the pricing of assets in China and the U.S. has begun to reverse risk appetite. Against this backdrop, the pattern of "strong U.S. stocks - strong U.S. dollar - weak U.S. Treasuries" has shown significant loosening.

First, risk assets represented by U.S. stocks have significantly declined, now down for four consecutive weeks. The duration of the decline has exceeded the "recession trade" of July 2024. The Nasdaq index has not only erased all gains since Trump's election but has also further dipped to mid-2024 lows.

Second, U.S. Treasury yields have significantly declined. The 10-year U.S. Treasury yield has dropped nearly 90 basis points from a January high of 4.9%, currently hovering around 4.2%. The 2-year U.S. Treasury yield has fallen below the 4% mark. Rate cut expectations have changed from a maximum of 1 time for the entire year to 3 times.

Finally, the U.S. dollar index has also undergone significant adjustments, falling from a high of 110 points at the beginning of the year to the current 103, essentially returning to levels before Trump's election.

Why has this round of U.S. assets experienced a significant adjustment? We believe there are three main reasons: loosening of the tech narrative, tariff shock shrinking risk appetite, and concerns about recession triggered by tariffs and fiscal contraction. After the holiday, China's Deepseek emerged, marking a technological advancement in the AI field that signifies the weakening of the United States' "AI technology monopoly" and the diffusion of AI technology from the U.S. to non-U.S. countries. This technological breakthrough is very important as it begins to shake the foundation of the U.S. "exceptionalism" narrative—where the U.S. stands alone in AI technology, making it difficult for other countries to compete. Consequently, the global flow of dollars has shown some signs of loosening.

Since Trump took office, he has continuously played the tariff card; however, the implementation and effects of the tariff policy have been erratic. The market's pricing of U.S. tariffs has gradually shifted from the "inflation effect" before Trump's presidency to the recent potential "recession effect" on the economy, leading to an overall contraction in risk appetite.

High interest rates limit credit expansion. In the fourth quarter of last year, the "Trump trade" pushed U.S. Treasury yields upward, and the elevated Treasury yields suppressed U.S. credit expansion, with signs of weakening demand related to private sector credit beginning to emerge, leading to growing expectations of a U.S. recession.

II. Behind the Volatility of U.S. Assets: Where Are the Global Technology Cycle and Dollar Tidal Flow Heading?

We place great importance on the direction of U.S. assets because the global economy is entering a new industrial revolution cycle driven by AI in 2023-2024.

In this cycle, the significance of AI to the U.S. lies in its ability to allow the U.S. economy to transcend global demand, which is why U.S. assets exceed the U.S. credit cycle, and it is also the source of the U.S. "exceptionalism" narrative.

For the world, the significance of AI lies in whether the continuous influx of global funds into U.S. stocks will be disrupted and whether the global dollar tide will experience a significant reversal.

Therefore, after "Black Monday," the world is keenly focused on two questions: First, is the U.S. economy's recession and the U.S. asset market truly at a major turning point? Second, is the global technology cycle and dollar tide experiencing a reversal?

If the answer is negative, meaning that the technology cycle and the U.S. recession narrative have not yet reached a turning point, then the current performance of U.S. assets and the narratives contained within that performance can be likened to July 2024, when the market was trading on the recession behind the "Sam Rule," yet ultimately the market chose to price U.S. AI technology, allowing U.S. assets to ultimately transcend the "recession narrative."

If the answer is affirmative, then the global technology cycle and the direction of U.S. assets will resemble the performance of 2001, which was when the last technology cycle ended in the U.S. R&D phase, leading to a significant and sustained decline in U.S. risk assets.

III. Changes and Constants in Global Asset Pricing Amidst the Upward Trend of the Industrial Cycle

We tend to believe that the risk assets represented by the U.S. stock market have not yet reached a true turning point in the past four weeks. This is because there are three cycles that determine the U.S. economy—technology cycle, credit cycle, and fiscal cycle. Among them, the technology cycle is the most fundamental and important, as it essentially determines the direction of U.S. assets, global industries, and even the global dollar tide.

Looking back at the last round of the internet-driven industrial revolution, we assess the current stage of AI technology in the U.S. We believe that global investment in AI research and development is still advancing, which means that the investment phase in AI research and development has not yet ended. For the U.S., the industrial cycle driven by the technological revolution is still in the expansion phase.

This also means that after the fluctuations in the U.S. stock market, there is a rebound opportunity, and U.S. Treasury yields may turn upward, while the probability of a significant decline in the U.S. dollar index in the short term is relatively low.

Specifically, from the perspective of the three cycles regarding U.S. assets:

First, as long as the AI technology narrative remains intact, we are still in the first phase of the "three-stage theory of technology" that we proposed, and upstream capital expenditure continues to accelerate.

Second, the credit cycle may once again move towards easing, with traditional industrial cycles represented by real estate potentially moving upward, and durable consumer goods possibly warming up. The further opening of the credit cycle depends on whether U.S. policies become clearer and whether inflation rebounds.

Third, the main trading currently revolves around the "contraction" of U.S. fiscal policy; if the U.S. implements tax cuts in the future, fiscal policy may still have "expansion." Therefore, we emphasize closely monitoring the pace of U.S. fiscal reforms, while also paying attention to potential tax cuts and other policies.

However, it is important to emphasize that after the holiday, Deepseek indicates that this round of technological revolution has indeed welcomed some marginal changes. In the first phase of the technological revolution, China can share the technological achievements of the research and development phase with the U.S. This implies two outcomes: (1) there are resonance opportunities between U.S. and non-U.S. (mainly China) risk assets; (2) or U.S. risk assets may become more speculative, which means that the amplitude of fluctuations may increase.

Regardless, the global technology-driven industrial cycle has not yet entered a turning point. We believe that the current adjustment of U.S. assets is not similar to the "internet bubble burst" of 2001, but more akin to the "recession trade" of 2024.

Authors: Zhou Junzhi, Sun Yingjie, Source: CSC Research Macro Team, Original Title: What Does the "Black Monday" of the Nasdaq Mean?

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