Thierry Hasse: We’re watching topsy-turvy markets for key signals
In the span of just over two weeks the narrative in the global financial markets changed abruptly. It went from ebullience in equity markets to the fear of an imminent recession.
The “great rotation” that started in mid-July promised to finally include “value” and small cap equities in the bull market. Instead it turned into a global equity sell off.
These rapid developments were brought on by three factors. First, the Federal Reserve decided to hold interest rates steady during its Federal Open Markets Committee meeting last week. Second, the Bank of Japan raised rates, which triggered massive selling in Asian markets. Third, large technology companies reported earnings that were a mixed bag. Second-quarter financial performances were solid and beat Wall Street estimates, for the most part. But the companies’ cautious outlooks for the second half of the year prompted investors to take profits in many names, including Google, Amazon and Qualcomm.
Chief Investment Officer Thierry Hasse
Equity markets, meanwhile, were marking time for the release of Amazon and Apple earnings on Thursday after the close of business. While investors rewarded Apple for providing the first increase in quarterly sales in more than two years, most technology shares were sharply lower on Friday, led by a 9% drop for Amazon and 25% for Intel, its worst performance in more than 50 years. (Source: CNBC.) The NASDAQ entered correction territory, having dropped over 10% since July 10 as investors have grown disenchanted with heavy capital expenditures for artificial intelligence with very little to show for so far in terms of return on investments.
The final straw that led to heavy selling in equity markets came Friday with the release of the U.S. jobs report for July. It was unequivocally weak across the board. Non-farm payroll grew by 114,000, well below the 175,000 expected. The two prior months’ numbers were revised lower: The unemployment rate jumped to 4.3% from 4.1%, and the number of hours worked per week fell to pre-pandemic levels.
In fixed income markets, interest rates were sharply lower across the entire yield curve with two-year notes down almost 50 basis points on the week (Source: Barron’s.). The financial commentators were quick to adjust their rate projections for the balance of the year and criticized the Federal Reserve for being behind the curve and risking a recession by keeping such a restrictive monetary policy for too long.
This week we will be watching for signs of stabilization in the equity markets. The key question: Is this a normal correction during a seasonally weak period or the start of a more negative trend? We believe it is the former, where extended valuations are corrected but the underlying profitability and earnings growth potential of U.S. corporations remain intact.
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