August 8, 2024
Good morning,
It seems unusually noisy in markets for an early August. Last week, we got weak enough economic data on Thursday to raise some eyebrows, followed by light employment data on Friday, which was far from a major event. But the market has been in correction mode since 7/16 and just didn’t take these two negative surprises well – the S&P 500 Index (SPX) dropped ~3.5% over Thursday and Friday combined. Then, in another surprise, the Bank of Japan decided to raise interest rates. It triggered the reversal of carry trades that have funded global asset purchases for the past several decades. On Monday, Japanese equities tumbled the most since the 1987 crash, and the VIX Index spiked to its highest level in almost four years. The SPX was down another 3% on Monday. Markets spent Tuesday assessing the damage and determined it may have overreacted – the SPX was up 1% on Tuesday. The market opened in positive territory again yesterday, but by mid-day, the morning’s +2% gain on the SPX had been erased by a poor Treasury auction and rising tensions in the Middle East. This morning’s jobless claims came in lighter than expected, and the Futures are up by almost 1%. Volatility remains elevated, and I don’t need to give you the VIX reading to know that. The market remains in correction mode, and volatility will likely be with us for a few more days.
Looking further out, Fed fund futures went from pricing in about two cuts in 2024 as of last week to five currently. At first glance, more rate cuts would seem bullish for equities because they lower borrowing costs and make stocks more attractive on a valuation basis. But that has not been the case historically. The S&P 500 has risen at a faster pace when the Fed has eased rates slowly (four or fewer cuts in a year) than when it has cut quickly. The reason is that the Fed has moved slowly when permitted and quickly when forced. The FOMC has rapidly reduced rates when it has deemed recession risks are rising, but they have almost always been too late by that point. I suspect the Fed will hike by a quarter point on 9/18 and disappoint markets that they didn’t do more.
Be well,
Mike
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