This has been a very volatile week across global capital markets, with central bank policy, economic data releases and earnings from major technology companies driving the action. We wanted to bend our rules about how frequently we communicate with you a little bit, as this past week was eventful, and we thought a few timely comments were in order.
Before we jump into a quick review of this week’s activities, let’s start with the broad context of a very good market year to date, with many equity indices up double digits and bonds doing well. We would add that certain parts of the market, e.g., the Magnificent Seven big tech stocks, have been up a lot more than the rest, and had some pretty lofty valuations.
As always, a big benefit of diversification is to avoid having too much of a good thing, since what goes up so far so fast can come back down in a hurry sometimes – as they did Thursday and Friday.
What Happened?
Wednesday was the best day for the S&P 500 (1.58%) and Nasdaq (2.64%) since February as investors embraced the stage set by the Fed at this week’s meeting to start cutting rates in September.1 But those gains were quickly wiped away as equities fell sharply Thursday and again Friday.
The big debate since the Fed started raising rates in March 2022 was whether their efforts to kill inflation would also end up killing the economy. The concern now is that Fed may have waited too long to begin cutting rates since there is a multi-month lag before cuts begin to have full impact on economic activity. Now the discussion is how many cuts this year, and will they be 50 basis points instead of the usual 25? It appears interest rates are headed down.
Bad Numbers to End the week
Up until recently most of the economic data suggested the economy was resilient to the rate hikes, but recent data is suggesting otherwise. Thursday, weekly jobless claims came in higher than expected,2 and more significantly, the ISM Manufacturing Index, a key gauge of manufacturing activity, came in at 46.8 — a number below 50 indicates contraction.3
And then Friday’s numbers changed everything. We got a very weak non-farm payroll number, the unemployment rate rose to 4.3%, and other weak numbers added to the dismay.4 Recession fears are back, and equities declined sharply. On the other hand, treasuries rallied, with yields on both the Two- and Ten-year treasuries dropping well below 4%.5
Adding to the concern was the sudden thought that this AI thing may have gone too far too fast. Most of the big tech stocks (e.g., the Magnificent Seven) got hammered. And chipmakers got hit even harder – Roger’s old employer Intel dropped like a stone, suffering a huge one-day loss of -26%!6
Meanwhile Japan’s stock market is down 15% since it’s all time high on July 11 — including down 6% Friday.7 The Japanese central bank has raised rates which has caused the yen to strengthen which hurts Japanese exporters.
So, What Now?
Now we wait to see how things develop, as we look for opportunities to rebalance and tax loss harvest. As always.
Remember that 10% corrections are common and occur typically once a year. Maybe we’ll get there in the coming days or weeks, or maybe not — but good to be prepared and aware of the issues the markets are struggling with. This kind of rapid change can be unsettling in the short term, but it is all part of the long-term process, and we have seen it before.
This is shaping up to be quite a year in many ways, and there is surely more to be revealed.