Friends
I mentioned in our June 28th email that it is common during a calendar year for the market to experience a 5% to 10% pullback in stocks and that we wouldn’t be surprised, given all that is happening, to see something like that in the second half of 2024. Well, here we are. We have also mentioned that for the most part the environment was good for stocks in the first half of the year. The economy was growing (3% in the second quarter), inflation was lessening, and corporate earnings were mostly good. In addition, it was believed that the Fed, because of the lessening inflation part of the equation, was going to be able to begin to lower interest rates (Fed Funds).
Recently, things have begun to change the narrative. Yes, inflation numbers are getting better but now we are seeing a hiccup in the jobs market. The unemployment rate is ticking up and new job availability is lessening. Indeed, market participants are clamoring for rate cuts immediately from the Fed with Wharton School of Business professor Jeremy Siegel calling for an immediate .75% cut in the Fed Funds rate (was he reading our email last Friday?) In addition, many economic data points have been signaling that the economy is slowing, today’s ISM Services number notwithstanding (hint: it was actually better than expected).
So going into this weekend the set up was already less than stellar and then we add the Japanese carry trade. Basically, Japan has held their interest rates at zero for 15 years. This entices investors to borrow yen and invest elsewhere. If the yen continues to fall, then all is well. If Japan raises interest rates which they did just a quarter of a point, then the yen rallies and the trade begins to unwind. You’ll hear this referred to as the yen carry trade on the news channels. To cover losses, those positioned as such begin to sell other assets to raise the money needed. Asian markets tanked on Sunday night setting us up for what we saw at the open this morning.
As we know, selling often begets selling and today we saw all of these factors converge, along with news this weekend that Warren Buffett has sold half of his Apple position now and has a huge cash hoard, to produce a large selloff in U.S. stocks.
By the close, the Dow Jones Industrial Average was down 1,033 points to finish the day at 38,703. The S&P 500 was down 160 points to close at 5,186. The Nasdaq Composite Index was down 576 to close at 16,200. Gold was down $16 to trade at $2,453 per ounce, while oil was up $.22 to trade at $73.74 per barrel WTI.
So, what do we do on days like this? The late Jack Bogle of Vanguard Funds fame had a great saying – “Don’t just do something, stand there”. In other words, it is never wise to emotionally react to market moves like this. Keep calm and stick with the game plan that we have in place. We know stocks don’t just go up. If they did it would be easy, and everyone would have every penny they had in stocks. Investing in stocks carries volatility risk and that’s why over long periods of time, returns in stocks are better than bonds or cash. Accepting the volatility risk allows the investor to gain superior returns over time.
But we don’t know how long it will take for the “carry trade” to play itself out. Though we have seen a slowdown, parts of the economy appear fine. Will the Fed step in and lower rates before the next meeting? That might look somewhat panicky if they do, but as we have seen in the past (the covid pandemic most recently), if the economy, not the stock market, is in jeopardy the Fed will step in.
Finally, falling stock prices are great for investors who are in the accumulation phase of the investing cycle. It’s always good to buy at lower prices. For those in the distribution phase of your investment life, having a substantial cash/money market position to cover a year or two of income allows you to absorb the volatility that will forever be part of your equity portion of your portfolio. The equity portion in return allows your portfolio to continue to grow in the long run.
We’ll do our best to keep you informed as this disruption plays out. If you want to talk about how all of this makes you feel or have any questions don’t hesitate to call. We’re here.
Have a nice evening everyone.
