Market Jitters (8-5-2024)

Hello Friends,

I’m writing to give a brief update on the markets. Equity markets in the U.S. and abroad (especially in the U.S. Mega cap Tech space), saw outsized gains this year, through the month of June. The trend started reversing a bit in July and it seemed as though the market participation was broadening out with Small Cap stocks joining the party in July with tech stocks giving back some of their gains.

Enter August 1st:

The jobs report showed a fairly sizeable miss from estimates which is a signal of perhaps a slowing economy. While this information could have been useful to the Fed in their meetings that concluded the day before, keep in mind that the Federal Reserve tends to operate on lagging data. Volatility picked up markedly towards the end of July and into the first couple of days of August.

Enter August 5th:

Global markets sold off hard and the Volatility Index (VIX), often known as the “Fear Guage” saw a rapid spike today with levels not seen since the Covid Induced shut-down era in 2020. What spooked the market today? The unwinding (or perhaps the beginning of the unwinding?) of the Japanese Carry Trade.

What is the Japanese Carry Trade?

As you may know, interest rates have been near 0% for decades at the central bank of Japan, known simply as “The Bank of Japan.” The Japanese equity market, as measured by the Nikkei Index, has had August 5, 2024 trouble finding it’s footing for much of the past 3+ DECADES, and has just this year finally eclipsed Index levels seen in the Japan Asset Bubble that concluded in 1989. So what did people do to take advantage of Japan’s perpetually low interest rates? They borrowed money in Japan, in Yen, at very low interest rates and invested that money in higher yielding investments abroad in foreign denominated currencies. That sounds genius until the price of the YEN relative to other currencies appreciates markedly, which it has in the past three weeks after the Bank of Japan raised interest rates from 0.10% to 0.25%. This caused an unwind of a portion of the upwards of the estimated $4 Trillion involved in this carry trade. By this, I mean, investors were either forced (due to leverage) or spooked into selling their foreign (non Japanese) investments in a bid to convert the assets back to Yen to cover their debts in Japan. This perpetuated and gained steam and contributed to the spike in Volatility in markets across the globe.

So, what has worked recently?

Having allocations in fixed income investments has helped as Interest rates have come backwards this past week for a couple of reasons. 1) U.S. economy data points to easing inflation and a slowing economy 2) A clamoring to safe haven investments during equity selloffs. Both of these factors have led to a rise in Bond Prices. This feels good in the short-term for Bond investors, however it also means long-term interest rates are lower (good for Borrowers-think Housing market). Also, having a diverse mix of equities has helped. Looking at some of the darlings of the stock market the past several months which have seemingly single-handled pulled the markets higher, many of these companies lost significant amounts in the past few days. Clients with more diversification, fared much better.

So what now?

Volatility leads to Opportunity. No two markets are alike, though over time, similarities do exist. I have reviewed every single household that I manage throughout the day seeking opportunities. What I have found is that Allocations are still mostly intact though I will continue to monitor portfolios through heightened volatility and action will be taken when it’s deemed to be obvious enough to add value to you over the long run. For now, stay the course and we’ll be seeing you!

Thank you,

Eric Horne, CFP®, MBA

Arc Element Wealth Design

Disclosure Statement

This newsletter is for informational purposes only and should not be considered investment advice. Arc Element Wealth Design (AEWD), a Nebraska-registered investment adviser, does not guarantee the accuracy or completeness of any information provided. Investment decisions should be based on an individual’s personal objectives and financial situation, and all investments involve risk. Past performance is not indicative of future results. For further information about AEWD’s advisory services, please review our Form ADV, available upon request.