Market Update – August 5th, 2024

After fielding some questions from clients over the past few days, I wanted to provide a quick update on what’s going on in the markets.

What’s Happening In The Markets and Why Are They So Volatile?

Today the markets continued last week’s selloff, on the heels of weaker-than-expected employment numbers Friday, and an over 12% loss in the Japanese Markets (Nikkei 225) overnight, its largest selloff since 1987.  As such, I wanted to provide you with some context.

5 Reasons Why

1. The Fed has a dual mandate, meaning they must adjust rates to balance employment with keeping inflation in check.  Until Friday, it appears the market felt the Fed was doing a good job balancing the two, as unemployment was low and inflation was coming down.  Friday’s monthly jobs report showed employers hiring much slower than economists (and companies) forecasted, implying the Fed may have had their foot on the brakes (interest rates too high for too long), and thus slowing the Economy too much – think: Recession.  It’s notable that the US economy is still growing at a healthy 2.8% annual pace, based on Q2 numbers.   As I’ve said many times before, the market is forward-looking.

2. The market has been trading at historically high levels, both on an absolute level, with various indexes trading at record highs, and on a relative basis, with many individual stocks, particularly those in the technology sector, trading at highly elevated multiples of almost any metric you can think of (earnings, book values, revenue to enterprise value, growth, etc).   It’s normal to expect a recalibration during times of market stress, and much of this pain will be suffered by the recent market winners.

3. Last week, Japan raised it’s interest rates for only the second time since 2007, to its highest rate in over 15 years.  The market was not expecting this hike, which came only months after Japan ended eight years of negative interest rates.   During this time, many institutions were borrowing from Japan at exceptionally low rates, and investing in riskier assets such as US Stocks.  Now that Japan has made it clear of their intentions to strengthen its currency, this “carry-trade,” must be unwound.

4. The odds of a broader war in the Middle East continue to increase.   Iran is now warning Pilots to avoid the area, with the implication that a wider response to recent Israeli assassinations of Hamas and Hezbollah leaders is expected in the coming days.

5. In case you’ve missed all of your spam texts, turned off the TV, and disconnected your internet, you know there’s an election coming up.  I believe the market is digesting the possibility of a Harris Presidency and its implications for businesses.

What Should You Do?

1. Don’t Panic.  We’ve grown accustomed to remarkably calm markets since the Pandemic, but it’s important to remember that market selloffs are a normal part of investing.  Without them, we would expect returns similar to that of cash.  As I wrote in late 2023, as markets go down, expected returns go up!

2. We invest because we believe that over the long term, we are better off investing in the stock market than putting money under the mattress.  If you don’t have a long enough time-horizon (think 5-7 years or more for the money that’s in stocks), then it’s time to evaluate moving some of your assets to a less-risky asset class such as bonds or cash/treasuries.

3. Use market selloffs as a time to convert assets from traditional IRAs to Roth IRAs.

4. Consider tax-loss harvesting

5. Consider rebalancing back to your long-term target allocation

6. If you’ve been sitting on cash, waiting for a market selloff, consider at what point you would begin entering the market.