-Darren Leavitt, CFA

Just a quick note for a bit of reassurance.  Financial Markets have been quite turbulent over the last several sessions, which was the case again this morning.  The context for the market sell-off incorporates a number of different variables, but at the end of the day, we think this is likely a healthy correction for the market and not the start of a larger sell-off or a transition to a Bear market.

Highly anticipated earnings from this year’s market leaders have been solid, but questions surrounding capital expenditures on AI initiatives and their likely return on investment have given investors a reason to take some profits.  Google, Microsoft, Meta, Apple, and Amazon had nice quarterly results, however, investors’ expectations were arguably higher and gave reason to sell the news.

A weaker-than-expected ISM manufacturing print alongside weaker US Initial Jobless Claims and Continuing Claims preceded a much weaker-than-expected July Employment Situation Report.  Fears that the labor market is falling off a cliff rattled the market and provided another reason to sell stocks.  We think there is some variability in these numbers and point out that there have been several revisions to these data sets over the last several months.  We don’t want to assign too much weight to a few economic data prints.  That said, there are a number of things that point to the consumer continuing to be resilient.  We continue to watch the data and, if needed, will recalibrate models to address the changing landscape.

Given the most recent weak economic data, it is now likely that the Federal Reserve will join the ECB, Bank of Canada, and Bank of England in cutting rates at their next meeting scheduled in September.  The market is signaling that the Fed will likely cut its policy rate by 50 basis points to 4.75%-5%. I view this as too aggressive at the moment and will look to the data over the next month to see if a 50-basis point cut becomes more valid.

Central banks’ divergent moves have also induced some of this market volatility, notably in the US Dollar/Japanese Yen currency cross, which has depreciated markedly from a month and a half ago. The Bank of Japan most recently raised its policy rate, while the Fed is now poised to cut rates more aggressively than previously thought—hence the Yen appreciation.  The Yen appreciation catalyzed an unwinding of a larger carry trade, which is being widely cited as the reason we have seen so much volatility in the Japanese market, which has fallen nearly 20% in two trading sessions.

These sudden market shifts are common, and they come at a seasonally weak time of year. I would also point to the continued uncertainties in the Middle East and Ukraine as influencers in this broader market context. Again, for the time being, we think that is just a healthy market correction and will continue to monitor the data for reasons to shift our model allocations.  Please let us know if you have any questions.