CIO Comments after Significant “Risk Off” Day

CHARLESTON, SC - AUGUST 5th, 2024

Author: Christian Salomone

Chief Investment Officer

christian.salomone@ballastrockpw.com

Office of the Chief Investment Officer

Today was a very volatile day for the global financial markets as “risk-off” sentiment caused investors to exit equity positions that have been popular all year. Overnight, Japan's Nikkei 225 index was down 4,451 points, recording its biggest drop in history. That is a daily loss of 12%, which takes the index down 25% since the July highs and erases all of this year's gains. A rapid appreciation of the Japanese yen against the US dollar and last week’s rate hike by the Bank of Japan has eroded the profitability of Japanese exporters, while causing carry-trade players to unwind their riskier investments, putting additional pressure on stocks.

This selloff triggered a broader decline in Asian, European, and U.S. stock Indices and increased global financial market volatility with the Vix at its highest level since the pandemic. This contagion further spooked U.S. markets already reeling from the weak jobs data on Friday, which sparked concerns about a potential recession in the world's largest economy.

The three major U.S. equity indices traded significantly lower (Dow -2.6%, S&P 500 -3.00% and NASDAQ -3.43%) while the Treasury curve steepened with 10yr US Treasury Yields touching their lowest level in over a year. Though the U.S. economy isn't as bad as the recent equity correction would suggest, it would be naive to ignore some of the warning signs which hint that the post-pandemic recovery is slowing.

Foremost is Friday's poor payrolls report, which saw the unemployment rate jump to 4.3%, its highest level in almost three years, though some of that was due to more workers re-entering the workforce. On top of that, recent tech earnings and forecasts have disappointed, while consumer-facing companies like Amazon and McDonald's are warning of potential weakness in the U.S. consumer. These data points suggest that the Federal Reserve has kept interest rates too high for too long and may need to loosen monetary policy quickly.

Market volatility should continue this week as investors are squarely focused on inflation data and Fed reaction to the market selloff. It is important for investors not to make rash trading decisions as this is likely a short-term phenomenon.

Please discuss with your financial advisor how the recent volatility might be affecting your individual portfolio. Email us at ir@ballastrockpw.com.