Markets have recovered some lost ground but investors will be looking for data to confirm the existing narrative for a soft landing, Ben Stewart argues. Photo / Eduardo Munoz Alvarez, Getty Images, File
By Ben Stewart, Vice President, Global Equities Analyst at Jarden Wealth.
OPINION
The insistent climb of US equities to 37 all-time high closes by mid-July 2024 had investors on edge, even as the S&P 500 basked in a strong 25.8% return over the preceding 12 months.
The euphoria, however, was short-lived.
By August 5 the S&P 500 had tumbled 8.5% from its peak, with the VIX Index, a real-market index representing the expectations for volatility, spiking to levels unseen since the chaotic days of March 2020 at the onset of the Covid-19 pandemic.
This sudden downturn was not a random blip, but the result of several market and political factors converging to rattle investor confidence.
Since then, markets have recovered some of the ground lost but investors will be looking for data to confirm the existing narrative for a soft landing if we’re to see markets retake all-time highs.
So, what are some of these contributing factors?
On the economic side, the data had supported a positive market narrative up until July.
However, a deceleration in job growth has impacted sentiment, leading to pre-emptive selling and fear of an impending recession. This fear reflects the market’s sensitivity to changes in economic conditions.
The Federal Reserve also gave its clearest signal yet that it was willing to cut rates as soon as September, an indication of a slowing economy and a move that would benefit smaller companies which are more sensitive to higher borrowing costs.
On the political front, the US presidential election was impacted by President Joe Biden’s resignation due to health concerns, resulting in a late changing of the guard to Vice-President Kamala Harris as the Democrat presidential candidate.
Adding to the already volatile US election, Republican candidate former President Donald Trump experienced an assassination attempt at a campaign event in Pennsylvania.
The market had been anticipating a “Goldilocks” scenario of a perfect balance where inflation eases, the economy stays strong, and interest rates fall. However, the idea of anything less than this balanced environment is causing growing concern among investors.
On the markets side, large cap stocks had a record run of performance and flows of money as portfolio managers allocated more and more capital to a smaller group of winners.
These included big tech stocks such as the “Magnificent 7″, as well as other stocks with good stories such as GLP-1 weight loss drug companies and smaller AI companies. As companies began to report earnings, some of the existing narrative came into question.
Magnificent 7 companies beat analyst earnings estimates by a smaller margin than previously, indicating there could be a deceleration in pace of growth coming.
AI-related investments were also called into question with companies indicating that although investment in the space remained high, there was a more steady pace of uptake from customers – not the breakneck revolutionary pace some in the market anticipated.
GLP-1 exposed Eli Lilly and Novo Nordisk to get sold off on competition concerns, first from reports that Roche (a Swiss pharmaceutical company) experienced good results for a competing GLP-1 product, then after Novo Nordisk reported results below expectations. This was later alleviated when Eli Lilly reported strong results and raised its guidance.
As the above dynamics were evolving, Japan’s central bank hiked its interest rates in early August and signalled more hikes to come. This triggered a record sell-off across Japanese equities and a surge in the Yen against the US dollar and other currencies.
Investors were caught off-guard, especially those engaged in the popular “carry trade”, where they borrowed in Yen to invest in higher-yielding assets, both domestically and abroad, taking advantage of different interest rates on loaned currency.
The sudden shift in Japan’s monetary policy upended this strategy, compounding the pressure on global markets.
Despite short-term volatility, some analysts remain optimistic about medium-term prospects for Japanese equities.
The structural reforms in Japan, including improvements in corporate governance and a shift towards higher capital efficiency, continue to support the market’s long-term outlook.
Additionally, with Japan potentially moving away from its low-interest rate policy, the Yen’s strength might continue, which could benefit unhedged international investors in Japanese stocks.
In the days that followed the Japanese turmoil, the markets have been attempting a tentative recovery, rebounding with a calmer mood.
With the next significant US Consumer Price Index print not due for a week, investors are left to analyse other indicators such as earnings results as the last of them drip through from reporting season.
For the past two years, global equities have been a star performer of the market, but the recent turbulence highlights the need for diversification not just across individual stocks, but also across geographies and asset classes.
Ben Stewart is vice-president, Global Equities Analyst at Jarden Wealth.
Jarden Securities Ltd is an NZX firm. A financial advice disclosure statement is available free of charge at jarden.co.nz/our-services/wealth-management/financial-advice-provider-disclosure-statement/.
Full disclaimer available at: jarden.co.nz/wealth-sales-and-research-disclaimer
How many people had paid deposits was not stated but pre-sales said to be 'strong'.