Presented by The PensionmarkMeridien Team, August 16, 2024
Last week was a wild one in the U.S. financial markets. There was plenty of emotion and news moving markets, triggered by an unwinding of the Japanese Yen carry trade. (More on that in a minute.)
Given that there are questions from a wide spectrum of investors, I thought I would share a special update on last week, as this week is sure to bring market-moving headlines.
U.S STOCKS INDEXES
After making record highs in July, the S&P 500 continued its retreat for the fourth consecutive week — but barely. The broadest measure of the U.S. economy flirted with ending the week in positive territory after being down by 3.00%1 in last Monday’s trading session.
Overall, for the week ending 08/09/24, the S&P 500 declined by 0.04%2, the NASDAQ 100 was actually higher by 0.39%3, and the Dow Jones Industrial Average decreased by 0.60%4.
It was a wild week with the lows in major indexes made on Monday and a grind higher (with volatility) for the remainder of the week.
YEN CARRY TRADE
With volatility spiking last week, the main culprit was the “yen carry trade.” So, here is a basic overview of what a carry trade is and what exactly happened.
- Carry Trade, Explained: In foreign currency markets (forex), when traders buy one currency, they sell another simultaneously. For an appropriate and timely example, take the USD/JPY – the U.S. dollar versus the Japanese yen. If an investor buys this currency pair, they are buying dollars and selling yen, which has been a popular trade in recent months and years as the Fed has raised rates here at home. This type of trade has moved the dollar higher and the yen lower5 over the last few years.
- “Carry” Overview: In Forex, at the end of each business day, a “carry” must be debited or credited from or to a trader. The trader that owns the currency that has the higher interest rate receives a “carry” similar to daily interest, also known as “roll.” Investors who are long (bought) the currency with the higher national interest rate get paid, and the investor who is short (sold) the higher interest rate currency has to pay it.
- What Happened: Long story short, last week, investors that were long the U.S. dollar and short the Japanese yen all headed for the exit ramp at once, with the catalyst being that Japan raised its interest rates from near zero to “around 0.25%.” With higher interest rates in Japan and the outlook for lower rates here in the U.S., the yen carry trade is less attractive.
RIPPLE EFFECTS AT HOME
We saw volatility, as measured by the $VIX index, spike last Monday to levels unseen since COVID in March of 2020, according to Factset.
Traders and market veterans will tell you that the VIX index spiked above 60 in Monday’s premarket trading, ahead of the 9:30 cash open, and that it never actually transacted at that level.6
We can see the extreme spike in fear faded rather quickly once last week’s trading got started in cash markets. After spiking above 60, the $VIX settled near 20.37.7
So, volatility spiked and quickly dissipated. In fact, the $VIX Index finished in the red last week, losing 14.38%8. How about that? The S&P 500 and the $VIX tend to move in opposite directions overall. (Generally speaking, they are quite negatively correlated.)
Stock valuations and a recent surprise uptick in unemployment here at home surely contributed to the volatility last week, even though they were not direct catalysts.
JAPAN
As U.S. investor’s nerves began to settle down as last week progressed, many may have thought “Hey, this is a Japan problem.” The Bank of Japan has kept rates near and below zero for an extended period and executed its first rate hike in 17 years.9 But keeping the rate around zero for such a long time, especially with inflation running hot worldwide for the last several years, has its repercussions. Inflation is accelerating in Japan, and the rate hike was necessary to keep things in check. Japan’s major stock market index, the Nikkei 225, experienced its worst one-day drop since 1987 as the fallout occurred.
THIS WEEK: CPI & PPI
As markets continue to digest last week’s volatility, this week brings fresh inflation data in the form of Consumer Price Index (CPI) & Producer Price Index (PPI). Barring a surprise in CPI, this week’s price action (movement of stock prices over time) may play the most important role. We will just have to see how the continued digestion of events in Asia plays out, along with market sentiment surrounding the labor market and stock valuations during this election year.
We also get retail sales this week to gauge the consumer, as economists debate the short versus hard landing scenario.
DICTATE WHAT HAPPENS
Volatility comes and goes in markets — and man, did it come and go quickly last week. Let’s remember that the S&P 500 was 24.23% higher in 202310 and is currently 12.04% higher so far this year11 (as of market close on 08/09). Corrections or pullbacks are bound to happen. Nobody knows what this week will bring yet, but volatility could persist from last week’s levels, given the rebounding Iran/Israel narrative, Japan factors, CPI data here in the U.S., and other factors.
As a long-term investor, it is wise to think ahead and dictate what happens instead of reacting to it. While an investor can’t dictate the price of assets, they can dictate their reaction to price fluctuations. Responses will vary depending on one’s investment objectives and time horizons, among other factors. But in many cases, no action is needed other than sticking to the existing plan.
Uncertainty tends to reward investors over time, so sticking with a diversified portfolio including bonds can be one great way to attempt to minimize volatility in an investor’s portfolio.
As usual, we will be keeping you apprised of the latest developments. In the meantime, if you have any questions or concerns, do not hesitate to reach out. We are always here as a resource for you!
The PensionmarkMeridien Team may be reached at 866-871-9963 or meridienteam@pensionmark.com
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This content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and they should not be considered a solicitation for the purchase or sale of any security.
Citations:
1. NBC News, August 9, 2024
2. Trading View, August 11, 2024
3. Trading View, August 11, 2024
4. Trading VIew, August 11, 2024
5. Trading View, August 11, 2024
6. Bloomberg, August 9, 2024
7. Trading View, August 11, 2024
8. Trading View, August 11, 2024
9. World Economic Forum, March 26, 2024
10. YChart, 2024
11. Slick Charts, 2024
Advisory services offered by Pensionmark Financial Group. Securities offered by Pensionmark Securities, LLC, member FINRA/SIPC. Pensionmark Financial Group, LLC is affiliated through common ownership with Pensionmark Securities, LLC.