🥛 6 reasons why risk assets are selling off 📉

GM. This is Milk Road Macro, the newsletter that explains market panic better than your group chat explains their fantasy football losses.

Here’s what we got for you today:

✍️ What’s going on with the sell-off in stocks and crypto?
🎙️ The Milk Road Macro Show: Harry Dent: Demographics Run the Economy & They’re Pointing to a Massive Crash
🍪 Nvidia stock jumped after strong earnings

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WHAT’S GOING ON WITH THE SELL-OFF IN STOCKS AND CRYPTO?

There’s been some blood in recent weeks as risk asset markets sell-off.

We’ve seen the S&P 500 down 5%, and the Nasdaq down 8%.

While bitcoin is down 30% and the “AI trade” within the equity market has started to unravel.

There are all sorts of fears about the end of a bubble, the start of a new bear market and a big crash ahead.

So what’s going on?

Here are 6 potential reasons why risk assets are currently selling off…

1/ Growth scare?

A “growth scare” appears to be brewing.

So what’s a growth scare?

It’s when investors suddenly become worried that an economy is slowing down more than expected.

It doesn’t mean a serious growth slowdown or recession is necessarily happening - it just means the fear of weaker growth spikes quickly.

And we're definitely seeing metrics of U.S. growth starting to roll over now.

Here you can see the four-month change for:

🔵 U.S. underlying growth nowcast - estimate of real-time growth
🟢 Citi Economic Surprise Index (CESI) - measuring whether economic data is coming in above or below expectations
🟡 1-year U.S. inflation swap - market expectations of what inflation will be over the next year

Source: Augur Infinity

All three have been starting to roll over from roughly early September, but in particular since early November.

It’s starting to look similar to previous recent "growth scares" (early 2025, summer 2024).

Source: Augur Infinity

I'm not sure how much the U.S. Government shutdown would have directly affected this, my hunch is probably not that much - it likely would have happened anyway.

Growth scares are perfectly normal - they often happen roughly once or twice a year when sophisticated metrics detect a slowing in the rate of change of economic growth and market participants shuffle portfolios.

A regular "garden variety" growth scare would typically yield a roughly 5-10% correction for the S&P 500 and a roughly 5-15% correction for the Nasdaq.

And we've already seen a 5% correction for the S&P 500 and an 8% correction for the Nasdaq.

Of course, it could turn into more than just a "growth scare" - deteriorating into a serious and prolonged growth slowdown, or even a recession.

But, on this occasion, my view is it probably won’t.

2/ Dollar strengthening

We have also seen the dollar strengthening meaningfully in recent weeks.

I mention the dollar in every Macro PRO report - and for a reason.

In my opinion, the dollar is probably the most important thing to watch to get a sense of what’s happening in asset markets.

During the first half of 2025, the Dollar Index (DXY) weakened a lot, and this helped to power risk asset markets forward through the summer.

But since then it’s been curling back upwards, particularly since mid September.

Source: TradingView

When the world reserve currency (dollar) strengthens relative to other currencies, it tightens financial conditions and squeezes the global economy (more than 70% of world trade is denominated in dollars and more than 70% of global debt is denominated in dollars).

Typically, the more the dollar strengthens, the more of a stranglehold it puts on risk assets - and this relationship is generally leading (i.e. the dollar moves first).

Here you can see the DXY three-month change (inverted and advanced by two months), overlaid with S&P 500 three-month change:

Source: TradingView

Here you can see the DXY three-month change (inverted and advanced by three months), overlaid with bitcoin three-month change:

Source: TradingView

Ideally, bulls would want to see the DXY start to weaken again, which would help to loosen financial conditions.

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WHAT’S GOING ON WITH THE SELL-OFF IN STOCKS AND CRYPTO? (P2)

3/ Fed turning more hawkish

The Fed has tilted more hawkish in recent weeks.

The market had previously been pretty certain of a rate cut in December.

But the pivot started at the most recent FOMC meeting in late October, with Fed Chair Jerome Powell defiantly stating a December cut “is not a foregone conclusion, far from it”.

Since then, we’ve seen a deluge of “Fed speak” from other FOMC members, and many of them have also pushed back on a December rate cut.

Market-implied odds of a cut in December have tumbled from more than 95% to 33%.

Source: CME FedWatch

On the surface, the narrative of “the hawkish tilt negatively affecting risk assets” appears to make sense.

The worst of the recent risk asset sell-off has occurred after the October FOMC.

Source: TradingView

But while the Fed is turning more hawkish on December specifically, the market is still convinced the central bank remains firmly in an “easing cycle”.

This can be seen by viewing the “terminal rate” (where the market expects the Fed to cut rates towards during this particular easing cycle).

Source: Augur Infinity

While the Fed has turned more hawkish on December, the terminal rate has barely budged.

It currently sits at roughly 3% (current Fed Funds is 4%), implying four more 25bps interest rate cuts ahead.

4/ Fears of an AI bubble

Fears surrounding an “AI bubble” - or concerns over excess speculation and “overvaluation” of AI names - has been growing in recent months.

This can be seen through Bank of America’s latest Global Fund Manager Survey.

45% of Fund Managers see an “AI bubble” as the “biggest tail risk” currently.

Source: Bank of America

In a separate question, more than 50% of Fund Managers thought that AI stocks are in a bubble.

Source: Bank of America

These “bubbling” fears have fueled a rotation out of AI and AI-linked names in recent weeks.

However, yesterday Nvidia (the most important company in the world) reported very good earnings - largely beating expectations and raising future expectations.

Nvidia is important, not just because its massive size makes up a large chunk of major indices like the S&P 500 and Nasdaq, but also because it acts like a barometer for the AI boom.

The Nvidia earnings report states:

“Compute demand keeps accelerating and compounding across training and inference - each growing exponentially. AI is going everywhere, doing everything, all at once.”

The Nvidia earnings may well help to prop the “AI trade” back up.

Bulls may have been saved once again by Jensen Huang (Nvidia CEO).

5/ Rotation out of speculation

Not only has there been a rotation out of AI names specifically, but there’s also been quite a big and noticeable rotation out of generally more speculative assets and into safer/more defensive assets.

While the damage to the headline indices (S&P 500 and Nasdaq) is not really that bad - there is some big damage elsewhere.

A lot of more speculative stocks have been hit hard (many -20% or more).

This also affects bitcoin and crypto - which are viewed as “higher beta risk assets” by the market (so they generally get hit harder on the way down).

My “speculation gauge” - ARKK/SPX* - has been falling since early October, and particularly rapidly since early November.

*Ark Innovation Fund (“disruptive tech” equities) relative to the S&P 500 (broad large cap equities).

Source: TradingView

According to this gauge, we’ve seen the same level of “speculation rotation” that we saw earlier this year during the big market correction in February, March and April.

6/ Systematic strategies deleveraging

I often mention flows from systematic strategies - because they are very important.

Systematic strategies are quantitative funds that mechanically buy and sell stocks based on certain rules (often tied to trend and volatility) - and they control huge amounts of capital.

Between May and September, systematic strategies loaded up on hundreds of billions of dollars worth of stocks due to the low volatility and trending nature of the market.

But now, these strategies have firmly “switched” to selling, which can exacerbate a stock market correction.

The “deleveraging” has begun in recent weeks and will continue if stocks continue dropping and volatility continues rising.

Source: Tier 1 Alpha

This type of deleveraging situation can sometimes turn into a “cascade” where systematic selling triggers further systematic selling (this happened in late March/early April this year).

So the market really needs a catalyst with enough power to stem the systematic selling flow.

And it might have potentially found it yesterday with Nvidia earnings.

Wrapping up

There you have six potential explanations as to why we are seeing what we are currently seeing in the charts.

I think that the good Nvidia earnings could be a big moment - because it may well stem the systematic selling flows and prop up the AI trade.

But, bulls really want to see the dollar (DXY) start to weaken from here.

The DXY continuing to strengthen would likely not be good news for risk assets.

Should underlying U.S. growth stabilize and stop rolling over - this would also be good news.

But we are in a bit of a messy situation currently.

We haven’t seen a large chunk of economic data due to the Government shutdown.

This missed data will now start trickling in (although some of it will never see the light of day) - and it’s only then will we have a better grasp of where the U.S. economy sits.

That’s it for this edition - catch you in the next one.

THE $29 TRILLION BUBBLE BURST? 💥

In today’s episode, we sat down with Harry Dent, a demographic economist, to talk about why he believes the economy is headed for a massive reset, and how demographics are driving it.

Here’s what you’ll hear:

Why Dent says demographics explain long-term cycles in growth, inflation, and market booms
The danger of $29 trillion in stimulus keeping “zombie” firms alive
How the U.S., Japan, China, and India face very different futures based on population trends
Why a deep market crash could hit between 2026 and 2028, and how to prepare now

It’s a banger of an episode, don’t miss it 👇