Market Update 8.9.24
Our Investment PerspectiveThere has been recent weakness in the stock market, but the decline accelerated this week. On Monday, the tech-heavy NASDAQ dropped -3.4%, the S&P 500 -3.0% and the Dow Jones Index -2.6%. We have been sounding the alarm on lofty valuations of key tech companies that dominate the S&P 500; those oversized companies led the decline. But they weren’t the only ones to have a bad day.
What started it? Overseas markets were falling long before US markets opened, so we started Monday immediately in decline as volatility measures spiked. After many years of maintaining artificially low short-term interest rates, the Central Bank of Japan raised rates last week. A popular strategy of borrowing in Japanese Yen and using the funds to buy U.S. Treasuries suddenly lost its appeal, and traders moved quickly to unwind. This boosted the Yen, weakened the U.S. dollar, and hit Japanese stocks hard.
Secondly, the U.S. had a weaker than expected employment report last Friday. Investors are now worried that our central bank, the Federal Reserve, has waited too long to cut interest rates and avoid a recession. This is quite a leap to conclusion from one employment report. Economic data has been softer as inflation has slowed; investors may remember that this was the goal of the Fed’s higher rates. This could be the beginning of the lauded “soft landing”. We expect the Fed will cut rates in September, and possibly again before year-end, but do not anticipate the central bank to announce an emergency interest rate cut prior to next month.
This Thursday’s weekly jobless claims data was better than expected, calming market nerves and suggesting that calls for a U.S recession were perhaps premature. Corporate earnings have been largely in line with analysts’ expectations. As of this writing, major indexes have rebounded, and mostly pared losses seen earlier in the week. We will be closely watching data releases and market developments in the coming weeks.
We are tactically re-balancing stock and bond positions where appropriate, while remaining committed to diversification and quality in your portfolio. In many cases, holdings have large unrealized capital gains that would incur tax liabilities if sold. Holding quality companies through turbulence to a rebound provides further deferral of your tax bill. As always, we believe strategic asset allocation and a sound financial plan are the key to long-term financial success and security.
Please call or email if you would like to discuss this further. Thank you for your trust and confidence in our firm.