What sparked Wall Street’s crazy sell-off?
By Elisabeth Buchwald, CNN
(CNN) — A stunning $2.5 trillion was wiped off the value of the tech-heavy Nasdaq on Thursday as investors rushed to dump tech stocks, rattled by fears that Democrats’ midterm victories could slow the AI buildout. But another force made the sell-off more brutal: Investors who had borrowed heavily to bet on the boom were under pressure to sell.
Hedge funds and other investors who borrow to make bigger bets may have to sell more stocks to cover losses and meet demands for cash, which can deepen a sell-off.
The market’s sudden reversal was striking: Futures initially fell when election results came in late Tuesday night, but on Wednesday morning, Wall Street had rallied as investors cheered Democrats’ gains. By Thursday, however, that optimism had given way to fears that Democrats could use their new political leverage to impose tighter regulation and rein in the AI buildout.
Take Texas, for example. Democratic Gov.-elect Gina Hinojosa campaigned on temporarily halting new data center construction and rolling back certain tax incentives for companies building them in the state. Those pledges are now adding to investor concerns about the future of the AI boom.
“What will happen is a day or two from now, people will realize that this isn’t the end,” said Jamie Cox, managing partner at Harris Financial Group. Companies will pour more money into increasing the capacity of existing data centers, he predicts.
Hedge funds, some of which borrow money to make bigger bets on stocks, then entered the story, amplifying the losses, Cox said.
Borrowing allows funds to make bigger investments than they could with their own cash, magnifying both gains and losses. As the value of their investments drops, funds that borrowed to buy those stocks can face demands from lenders or brokers to put up more cash or collateral. If they can’t, they may have to sell stocks to raise the money.
That selling can push stock prices down further, setting off a vicious cycle: Falling prices lead to more demands for cash, which force more selling and drive prices lower.
Thursday’s moves “are not indicative of a crash or any type of impending disaster,” Cox said. Rather, it’s “companies that have gotten way over their skis and leverage.” (Leverage refers to the act of borrowing money to buy more assets.)
The hedge fund-driven selling could take another few days to fully run its course, adding to the pressure on stocks even if the initial political shock begins to fade.
That underscores a bigger vulnerability in the AI trade: The more investors borrow to bet on the boom, the more painful the fallout can be when confidence starts to crack.
The-CNN-Wire
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