Dear clients and friends,
Financial markets this morning reflected a renewed concern of possible slower economic growth here in the U.S. These concerns appear to be exacerbated by an increase in the value of the Japanese Yen, and its impact on what is referred to as the “Yen carry-trade”.
Equity markets here in the U.S. were down Friday last week based on a disappointing jobs report. On top of this concern, a significant contributor to today’s decline, is due to the unwinding of what is referred to as the “Yen carry-trade”. The Yen carry-trade has long been a popular way for speculators to borrow cheap (Japanese Yen), and re-invest in more attractive markets (most typically US equities). Due to Japan’s recent interest rate hike, this is now a much less attractive “trade”, as it costs more to pay off these “bets”, and therefore, speculators are selling equities and other investments to repay these loans. One area that this is especially being felt is the “Magnificent 7” technology stocks here in the U.S. Positive expectations over Artificial Intelligence has arguably propelled these stocks to inflated values, thus making them ripe candidates for a pull-back.
It is important to remember that U.S. equity markets have recently had an extremely robust run without any meaningful “break”, or “correction”. We may now be seeing this temporary correction, or” breather” in the markets, while it attempts to digest not only today’s news, but also whether the U.S. will continue on a path to a “soft landing”, or whether growth is slowing more than anticipated. Some would argue that we are simply seeing a return to more normalized markets that react appropriately to negative news, while others believe this is a prelude to slower growth and ultimately a recession.
As of this writing, equity markets have come significantly off the lows at the open of the market. This is not surprising as markets tend to over-react initially upon hearing negative news. Additionally, we received positive news today from the Institute for Supply Management’s (“ISM”) services sector showing positives in both employment and activity. This contrast of “good news bad news” is not unexpected, nor surprising, as there are many factors to consider beyond the headlines of the day. Our experience has taught us that the phrase “patience is a virtue” could not be more applicable than in times like these.
Please know that we are watching very closely, and will contact you individually if we feel any changes in your strategy and/or portfolio is warranted. Of course, please do not hesitate to contact us, as we are available any time to discuss or answer questions.