August 5, 2024
The recent market sell-off has been driven by a complex interplay of factors, each contributing to heightened volatility and investor anxiety. Here, we explore what we believe are the key reasons behind the downturn and the broader economic pressures at play.[1]
- BOJ Raising Rates for the First Time Since 2007: The Bank of Japan (BOJ) recently raised interest rates to positive territory for the first time since 2007, ending a long period of ultra-loose monetary policy.[2] This move has significant implications for global financial markets, as it signals a shift towards tighter monetary conditions. The rate hike has led to a stronger yen, which in turn is affecting global trade dynamics and investor sentiment. This has also been a catalyst to the end of carry trades (see below).
- Massive Unwind of the Yen Carry Trade: The unwinding of the yen carry trade is another factor contributing to market volatility. Investors who borrowed in yen to invest in higher-yielding assets are now reversing these trades as the yen appreciates.[3] This unwinding is causing significant disruptions in global financial markets, leading to increased volatility and risk aversion.[4] As fears of an American recession spread, Japan’s markets suffered steep drawdowns. On August 5, the TOPIX (Tokyo Stock Price Index) plunged by 12% in its worst performance since 1987. The index is now almost 25% below highs reached barely a month ago. The yen, meanwhile, is snapping back, up 13% from less than a month ago when it was at its weakest in 37 years. These sharp moves carry implications not just for Japanese investors and firms but also for global markets, given Japan’s financial heft.[5]
- Weakening U.S. Labor Market: The U.S. labor market is showing signs of weakening, with job growth slowing and the unemployment rate ticking up to 4.3%.[6] This slowdown is raising concerns about the health of the economy, as a weaker labor market can lead to reduced consumer spending and lower economic growth. The Federal Reserve’s cautious approach to cutting interest rates has also added to the uncertainty, as higher borrowing costs continue to weigh on economic activity.[7]
- U.S. Mega Tech Market Concentration: The dominance of a few mega tech companies in the U.S. stock market has reached unprecedented levels. The “Magnificent Seven” – Apple, Alphabet, Microsoft, Amazon, Meta, Tesla, and Nvidia – now account for over 30% of the S&P 500’s market cap.[8] This concentration means that any negative news or performance issues within these companies can disproportionately impact the broader market. Investors are increasingly wary of this imbalance, fearing that it could lead to significant market corrections if these tech giants falter.
- Worries About AI Spend: Tech giants like Google, Amazon, and Microsoft are heavily investing in artificial intelligence, with upfront costs running into billions of dollars.[9] While these investments are aimed at aiding long-term growth, the immediate financial burden to implement AI is substantial. Investors are concerned that the returns on these investments may not materialize as quickly as anticipated, leading to margin pressures and potential underperformance.[10] This uncertainty is contributing to the overall market anxiety.
- Warren Buffett Selling Half of Apple Stock: Warren Buffett’s Berkshire Hathaway recently sold nearly half of its stake in Apple, a move that has sent concern through the market.[11] Apple has been a cornerstone of Berkshire’s portfolio, and this significant reduction in holdings has raised questions about the future prospects of the tech giant. The sale has also contributed to a broader sense of unease among investors, leading to further market declines.[12]
- Increased Geopolitical Risk: Geopolitical tensions have persisted, adding another layer of uncertainty to the market. Issues such as the ongoing Russia-Ukraine war, U.S.-China strategic competition, and continued Iran / Israel / Middle East wars are creating a volatile geopolitical environment.[13] These risks are causing investors to adopt a more cautious approach, further contributing to the market’s decline.
Recession Watch
Economic analysts have been predicting a recession due to high inflation levels. A weaker-than-expected jobs report signaled that the downturn might be imminent. The unemployment rate rose to 4.3% in July, with only 114,000 new jobs added, falling short of expectations. The Federal Open Market Committee held interest rates steady but signaled there could be potential rate cuts soon. Talk of a higher initial cut (50 bps vs 25 bps) in September is starting to enter the market outlook.
Despite modest GDP growth, the overall economic landscape remains uncertain, with concerns about a potential recession growing (the Sahm Rule[14], an indicator of recession, was triggered by the recent jobs report). The large amount of government stimulus, resilience of consumer spending, and a strong jobs market helped the economy defy predictions of a recession throughout 2023, but creeping unemployment can tip into a recessionary environment quickly. The Federal Reserve’s focus is shifting towards promoting full employment, with potential rate cuts on the horizon.
Portfolio Positioning Thoughts
Staying Invested for the Long-Term: Despite the current market turbulence, we believe it is crucial to maintain a long-term investment perspective. Historical data shows that long-term investments tend to outperform short-term trades, as the market generally recovers from downturns and continues to grow over time.[15] Selling in a falling market can lock in losses that may take years to recover from, whereas staying invested allows you to benefit from potential market rebounds.
Importance of Diversification: Diversification is a key strategy to manage risk and mitigate volatility. By spreading investments across various asset classes, sectors, and geographic regions, we believe investors can mitigate the impact of any single underperforming investment. A well-diversified portfolio can capture growth opportunities in different market segments, providing you with potential gains.
Utilizing Alternative Investments: Incorporating alternative investments, such as hedge funds, private equity, secondaries, and venture capital, can provide additional diversification and potential for higher returns. These assets often have low correlation with traditional stocks and bonds, offering a potential buffer against market volatility. Alternatives can enhance your portfolio’s risk-adjusted returns and provide exposure to unique investment opportunities.
Conclusion
The recent market sell-off is the result of a complex interplay of factors, ranging from concentrated market risks, significant AI expectations, geopolitical tensions, and shifts in global monetary policy. Each of these elements is contributing to a broader sense of uncertainty and volatility, making it a challenging environment for investors. We believe staying invested for the long-term, having a diversified portfolio, and utilizing alternative investments can all help to achieve your portfolio’s goals.
If you would like to discuss recent events and any of the above-mentioned commentary, please contact your Geller Advisors Relationship Manager or our Chief Investment Officer, Robert Wedeking at rwedeking@gelleradvisors.com, our Head of Investment Research and Strategy, Jonathan Barbato at jbarbato@gelleradvisors.com, or our Senior Investment Analyst, Nicholas Hall-Risko at nhall-risko@gelleradvisors.com.
Disclaimer
This article is being provided for informational purposes only and does not constitute legal, tax, or investment advice. Recipients should consult their professional advisors prior to acting on any information set forth herein. Geller Advisors LLC (“Geller”) is an SEC registered investment adviser. The information contained herein is for use by the intended recipient and cannot be reproduced, shared or published in any manner without the prior written consent of Geller. Registration with the SEC does not imply and skill or training. The information is limited to the dissemination of general information regarding Geller’s advisory services and should not be used or considered as, and does not constitute, an offer to sell or the solicitation of any offer to buy any securities or financial instruments or to provide any investment service or investment advice in any jurisdiction. Investing in securities involves varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, or any non-investment related services, will be profitable, equal any historical performance level(s), or prove successful. While all of the information contained herein is believed to be accurate, Geller makes no express warranty as to the completeness or accuracy nor can it accept responsibility for errors appearing herein. Any projections, market outlooks or estimates are forward looking statements and are based upon certain assumptions. Other events which were not taken into account may occur and may significantly affect performance. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur.
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[1] Represents Geller’s opinion.
[2] https://apnews.com/article/japan-economy-interest-rate-boj-b650a9b8a517bcf3a31c32ffdcf651c9
[3] https://www.nbcsandiego.com/news/business/money-report/investors-are-unwinding-the-biggest-carry-trade-the-world-has-ever-seen-socgen-strategist-says/3587973/
[4] https://www.benzinga.com/markets/asia/24/08/40154219/what-investors-should-know-about-yen-carry-trade-unwinding-that-is-sending-global-markets-into-a-tai
[5] https://www.economist.com/finance-and-economics/2024/08/05/why-japanese-markets-have-plummeted?giftId=9e5c5a07-fadc-4f80-98dd-ecf5ac5c3f04
[6] https://www.msn.com/en-us/money/markets/us-job-growth-slows-to-114k-in-july-while-unemployment-unexpectedly-jumps/ar-BB1r5nxn
[7] https://www.nbcnews.com/business/economy/jobs-report-july-2024-employment-numbers-analysis-rcna164651
[8] Source: Bloomberg as of 8/5/2024.
[9] https://www.morningstar.com/news/marketwatch/20240717840/microsoft-meta-amazon-and-google-face-this-growing-risk-around-ai
[10] https://www.investopedia.com/as-big-tech-ramps-up-ai-spending-investors-worry-whether-costs-will-pay-off-8669532
[11] https://www.msn.com/en-us/money/companies/apple-shares-drop-7-after-warren-buffett-s-berkshire-hathaway-slashes-stake-by-half/ar-AA1ofXRQ
[12] https://www.msn.com/en-us/money/topstocks/buffetts-berkshire-cuts-apple-stake-by-half-boosts-cash-stockpile-to-277b-as-it-gets-defensive/ar-AA1odyI1
[13] https://www.blackrock.com/corporate/insights/blackrock-investment-institute/interactive-charts/geopolitical-risk-dashboard
[14] Source: Fred St. Louis – “The Sahm Rule identifies signals related to the start of a recession when the three-month moving average of the national unemployment rate (U3) rises by 0.50 percentage points or more relative to its low during the previous 12 months.”
[15] https://www.investopedia.com/articles/investing/052216/4-benefits-holding-stocks-long-term.asp
