Monday Market Events Overview August 5th 2024

Presented by Marc Aarons

I hope all is well with you. As you may know, the S&P 500 had its worst day in almost two years on Monday, August 5, as stocks fell in response to weak international and U.S. economic data.

 I imagine you may have questions and concerns, so I wanted to proactively reach out with some key information on causes, effects, and other considerations. 

 What caused Monday’s sharp drop in the stock market?

 Several factors played into this steep drop, which started at the beginning of the trading day in Asia, before moving to Europe as its trading day began, and then to the United States.

1. The first issue at play is the unwinding of the yen carry trade, which has resulted in a fast-rising yen (the Japanese currency) versus the U.S. dollar and other major currencies. This caused issues with global deals, which created a cautionary theme among several financial markets worldwide. The effects of the yen rising quickly have led to a softer U.S. dollar and could continue to affect markets for an unknown period of time. Japan’s stock market, the Nikkei, suffered the most selling. However, it surged on Tuesday, recovering much of the previous day’s losses.
2. This selloff snowballed as investors more fully digested Friday’s U.S. labor market data, which showed the highest unemployment rate in almost three years and sharply lower hiring numbers (114,000 jobs added vs. Dow Jones forecasts for 185,000). The sharp miss in job creation further strengthens the probabilities for Fed rate cuts, as 50-basis-point cut, a possible emergency (action taken between Fed meetings) rate cut,  and multiple cuts all entered the conversation.
3. On a related note, the Federal Reserve opted to keep the benchmark overnight lending rate static at its most recent meeting on July 31 – just a couple of days before the labor market data was released. The combination of static interest rates and weaker economic data prompted concerns that the Federal Reserve had waited too long to cut rates, which could potentially cause a recession. But premature cuts could have further fueled inflation, and the Fed’s job is to get inflation back down to the target 2% level.
4. Also coming into play is a recent narrative shift away from artificial intelligence (AI) and technology, which have powered the stock market for many months. A number of companies in this space have reported lackluster earnings during this earnings season. 
5. Lastly, August tends to be a less active trading month, featuring lower levels of liquidity in many financial markets, meaning events like this often have more sway than they might in other months. 

How long will this last?

 At the moment, it’s not clear. Narratives can shift quickly (even in the time it takes me to send this email to you!). Case in point, futures for all three of the major stock market indexes had already bounced back by Monday evening and Tuesday saw higher stock index prices.  

 It’s possible – perhaps even likely – that will see some continued volatility over the next few weeks. Of course, I will keep you apprised of any pertinent developments.

 Are we about to enter a recession?

 First, let me offer an overview of some recent history. As you may know, the Federal Reserve (Fed) began a rate hike campaign in 2022 to curb out-of-control inflation. After 11 rate increases from 2022-2023, the Fed has kept rates steady, understanding that decreasing rates too quickly risks retriggering inflation. However, on the flip side, if the Fed waits too long to cut rates, it risks cooling the economy so much that it causes a recession.

 Given the July jobs report, some market watchers (and yes, economists) are concerned that the Federal Reserve has waited too long to cut rates. Still, even as the selloff occurred, other minor data releases showed some continued economic strength.

 It’s been a while since we’ve had a market correction, and it’s entirely possible that’s what we’re seeing. Of course, I do not have a crystal ball, and those who have tried to spell out when and if a recession will occur have been sorely embarrassed over the last few years. 

 How should I respond? Do I need to do anything? 

 It’s important to remember that volatility is not the enemy. Emotional decisions in the face of volatility are. 

 Diversified portfolios and a long-term focus help investors withstand the market’s ups and downs. For now, please know that we are keeping a close eye on market developments, with your best interest always in mind. 

 With that overview noted, if you have questions or concerns, do not hesitate to respond to this email or give the office a call. I am always here as a resource for you.

Marc Aarons may be reached at 714-887-8000 or Email Marc

Money Managers inc. Website

This communication is from Money Managers, Inc.; a Securities and Exchange Commission registered investment advisor.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities, and past performance is not indicative of future results.  Investments involve risk and are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed here.