The market meltdown that occurred just a few days ago seems like a distant memory now. If you’d like a more in-depth commentary and analysis on this topic, see my previous video blog from Tuesday.
I’m sure you saw the headlines. Now for the Cliffs Notes version of what occurred.
After hitting new highs last month, markets dropped dramatically, erasing months of gains.1
It felt like the sky was falling.
Let’s take a step back and take a look at what’s going on.
What’s behind the market drop?
A couple of major factors fueled the sudden selloff:
1. Weaker-than-expected economic data that sparked recession fears.
July’s soft jobs report triggered a recession indicator that caused U.S. stocks to sell off in fear.2
Though it does not appear that the U.S. is in a recession now, weakening economic data is increasing the risk of recession. However, there seems to be more of a consensus among economists that we will not enter a recession, and instead experience a “soft landing.”
2. Speculative currency trading by corporate investors.
“Carry trading” is a risky strategy that involves borrowing money in a currency with a low interest rate (such as the Japanese yen) and then reinvesting the money somewhere else where returns are higher.3
This strategy has become popular in recent years because of Japan’s very low interest rates.
Its success depends on cheap borrowing currencies and low market volatility.
However, that strategy is no longer paying off.
Japan’s central bank recently hiked interest rates, and markets grew more volatile, hitting traders with a double whammy.
The “unwinding” of these speculative investments triggered a global selloff as traders sold positions to cover losses.
There’s always a reason to sell.
Markets are always waiting for the next opportunity to melt down.
That’s part and parcel of being an investor these days.
There will always be something happening that can cause anxiety, fear, and the knee-jerk desire to sell.
But panic selling in response to a market stumble is the wrong move.
Selling and sitting on the sidelines typically means missing out on the best market days as investors sell the dip and turn positive again.
Though markets bounced back quickly, it’s possible the volatility and selling pressure will continue.
It’s very common for markets to experience a selloff after reaching historic highs.
We’re watching closely and monitoring the data, including possible Federal Reserve decisions that could move markets.
As always, we’ll reach out with any new material information and analysis on the markets and economy.
Sources
1. https://www.cnbc.com/2024/08/04/stock-market-today-live-updates.html
2. https://www.cnbc.com/2024/08/05/recession-what-is-the-sahm-rule-and-why-is-everyone-talking-about-it.html
3. https://www.cnbc.com/2024/08/05/carry-trades-a-major-unwinding-is-underway-amid-a-stock-sell-off.html
Chart sources:
https://fred.stlouisfed.org/series/SP500#0
https://www.imf.org/en/Blogs/Articles/2019/05/23/blog-the-impact-of-us-china-trade-tensions
https://www.cnbc.com/2021/03/16/one-year-ago-stocks-dropped-12percent-in-a-single-day-what-investors-have-learned-since-then.html
https://www.sciencedirect.com/science/article/abs/pii/S1544612323004208
https://www.bbc.com/news/world-europe-60506682
https://www.cnn.com/2022/07/13/economy/cpi-inflation-june/index.html
https://www.law.uw.edu/news-events/news/2023/svb-collapse
https://www.bbc.com/news/world-middle-east-67039975
https://www.cnbc.com/2024/08/05/stock-market-today-live-updates.html
Concerns or questions about how your investment portfolio will hold up in the current market environment? Contact Financial Synergies today.
We are a boutique, financial advisory and total wealth management firm with over 35 years helping clients navigate turbulent markets. To learn more about our approach to investment management please reach out to us. One of our seasoned advisors would be happy to help you build a custom financial plan to help ensure you accomplish your financial goals and objectives. Schedule a conversation with us today.
More relevant articles by Financial Synergies:
Market Meltdown: Explained
The market meltdown that occurred just a few days ago seems like a distant memory now. If you’d like a more in-depth commentary and analysis on this topic, see my previous video blog from Tuesday.
I’m sure you saw the headlines. Now for the Cliffs Notes version of what occurred.
After hitting new highs last month, markets dropped dramatically, erasing months of gains.1
It felt like the sky was falling.
Let’s take a step back and take a look at what’s going on.
What’s behind the market drop?
A couple of major factors fueled the sudden selloff:
1. Weaker-than-expected economic data that sparked recession fears.
July’s soft jobs report triggered a recession indicator that caused U.S. stocks to sell off in fear.2
Though it does not appear that the U.S. is in a recession now, weakening economic data is increasing the risk of recession. However, there seems to be more of a consensus among economists that we will not enter a recession, and instead experience a “soft landing.”
2. Speculative currency trading by corporate investors.
“Carry trading” is a risky strategy that involves borrowing money in a currency with a low interest rate (such as the Japanese yen) and then reinvesting the money somewhere else where returns are higher.3
This strategy has become popular in recent years because of Japan’s very low interest rates.
Its success depends on cheap borrowing currencies and low market volatility.
However, that strategy is no longer paying off.
Japan’s central bank recently hiked interest rates, and markets grew more volatile, hitting traders with a double whammy.
The “unwinding” of these speculative investments triggered a global selloff as traders sold positions to cover losses.
There’s always a reason to sell.
Markets are always waiting for the next opportunity to melt down.
That’s part and parcel of being an investor these days.
There will always be something happening that can cause anxiety, fear, and the knee-jerk desire to sell.
But panic selling in response to a market stumble is the wrong move.
Selling and sitting on the sidelines typically means missing out on the best market days as investors sell the dip and turn positive again.
Though markets bounced back quickly, it’s possible the volatility and selling pressure will continue.
It’s very common for markets to experience a selloff after reaching historic highs.
We’re watching closely and monitoring the data, including possible Federal Reserve decisions that could move markets.
As always, we’ll reach out with any new material information and analysis on the markets and economy.
Sources
1. https://www.cnbc.com/2024/08/04/stock-market-today-live-updates.html
2. https://www.cnbc.com/2024/08/05/recession-what-is-the-sahm-rule-and-why-is-everyone-talking-about-it.html
3. https://www.cnbc.com/2024/08/05/carry-trades-a-major-unwinding-is-underway-amid-a-stock-sell-off.html
Chart sources:
https://fred.stlouisfed.org/series/SP500#0
https://www.imf.org/en/Blogs/Articles/2019/05/23/blog-the-impact-of-us-china-trade-tensions
https://www.cnbc.com/2021/03/16/one-year-ago-stocks-dropped-12percent-in-a-single-day-what-investors-have-learned-since-then.html
https://www.sciencedirect.com/science/article/abs/pii/S1544612323004208
https://www.bbc.com/news/world-europe-60506682
https://www.cnn.com/2022/07/13/economy/cpi-inflation-june/index.html
https://www.law.uw.edu/news-events/news/2023/svb-collapse
https://www.bbc.com/news/world-middle-east-67039975
https://www.cnbc.com/2024/08/05/stock-market-today-live-updates.html
Concerns or questions about how your investment portfolio will hold up in the current market environment? Contact Financial Synergies today.
We are a boutique, financial advisory and total wealth management firm with over 35 years helping clients navigate turbulent markets. To learn more about our approach to investment management please reach out to us. One of our seasoned advisors would be happy to help you build a custom financial plan to help ensure you accomplish your financial goals and objectives. Schedule a conversation with us today.
More relevant articles by Financial Synergies:
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