The week in review: Chronicles of a wild ride in world financial markets
Global markets had a wild ride last week as volatility spiked. What we at Elevage Partners observed is a validation of one of our long-held beliefs for investing successfully: You want to choose when to buy or when to sell an investment; you do not want to be forced to look for liquidity at the worst possible time.
Chief Investment Officer Thierry Hasse
First, we believe the U.S. market is still offering the deepest, strongest pool of profitable corporations that have sustainable earning power far beyond what’s offered in the rest of the world.
Second, excessive leverage creates time bombs that never fail to detonate when one least expects it. Stick to high-quality, long-term investments while letting the hedge fund crowd manage and navigate high volatility transactions. Some are very successful, but most will fail.
Third, interest rates matter and will increasingly take center stage. The action of the central banks’ ability to encourage borrowing and spending is increasingly showing signs of limitations.
Here’s a recap of last week’s events
Following a disappointing U.S. unemployment report released on Friday, Aug. 2, equity markets finished the week with investors starting to fret about an economic slowdown possibly turning into a full-fledged recession. If only market participants had known the storm that would be unleashed in the country of the rising sun – Japan.
Sunday, Aug. 4: For those of us who systematically take a quick peek at the early action in the Asian markets on Sunday nights to get a preview of the week to come, the signs were ominous. The Japan Nikkei stock market was trading down 7% out of the gate on its way to a -12% day, which was worse than its reaction after the tsunami of 2011 and the resulting nuclear catastrophe of Fukushima. In just three trading sessions the Japanese stock market was down over 20%, putting it firmly in bear market territory. This dramatic sell-off was sparked by the Bank of Japan raising benchmark interest rates and effectively ending the popular “Yen carry trade.” (That’s borrowing cheap Japanese liabilities close to 0% and investing in much higher-yielding assets worldwide, such as the Mexican peso, for example.)
Monday, Aug. 5: Was this Black Monday, a Flash Crash or the start of a global meltdown? With equity markets in Europe significantly in the red, the early morning pre-market hours in the U.S. were looking like the end of the financial world. Dow Jones futures were priced more than 1,000 points lower and Nasdaq futures were even worse, close to -6.7%, which would have triggered circuit breaker rules designed to temporarily halt trading. Investors who wanted a lot of liquidity could find it – at a price! Apple, Amazon and Microsoft shares were all equally trading at -10% from the previous close in limited volumes before the official opening of the stock market. The U.S. markets had a difficult trading session, finishing the day between -2.5% to -3%. The VIX, a measure of stock price volatility that’s often called the fear index, doubled on the day. Fixed income markets enjoyed a very strong day as investors were seeking the safety of U.S. Treasury Notes, with the 10-year yield trading as low as 3.7%. However, selling in fear at the open would have been a mistake as the U.S. equity markets posted their worst levels right at the start of the trading session.
Tuesday, Aug. 6: Having witnessed a small bounce in the Japanese stock market and emboldened by the fact that volatility was not expanding any further, U.S. investors were actively engaging in a strategy that has been winning for the better part of the last 20 years: Buying the dip. However, by midday U.S. equity markets were starting to lose ground. Speculation that the U.S. economy might enter a recession was reinforced by discussion that the Federal Reserve might consider an emergency rate cut before its September Federal Open Markets Committee meeting.
Wednesday, Aug. 7: This might have been the most cruel day of the week. The Japanese stock market slowly regained its footing. The Bank of Japan tried to manage its communication to market participants that further tightening of monetary policy was not automatic. With this reassuring news from Asia, the U.S. markets opened strongly higher with market participants hoping to build a solid market recovery from the sell off experienced over the prior three days. However, the trading session in the U.S. turned into an ugly intraday reversal where the equity market finished the session much lower than opening levels. All S&P sectors turned in a negative performance. The mood on Wall Street markedly turned somber with conversations centered on whether this market correction could morph into a bear market.
Thursday, Aug. 8: Initial Jobless Claims, an economic indicator often derided due to faulty seasonal adjustments, provided the proverbial “dime” on which all markets across the world turned. With a decrease of 17,000 applications from the prior week, initial jobless claims provided evidence that while the labor market is slowing down it is not signaling an imminent economic recession. There would be no reversal in the U.S. equity markets that day. Stock prices advanced steadily all through the trading session in the U.S., providing the best daily performance since January 2023. (Source: Bloomberg.)
Friday, Aug. 9: No one would blame investors for taking a breather from a wild week of extreme gyrations in world markets by concluding the week with a quiet session. After avoiding the worst outcome and managing to recoup half the losses registered since the beginning of the month, market participants were eager to conclude the trading week with a relatively flat performance and maybe planning on enjoying a summer weekend.
The information contained herein represents the views of Elevage Partners at a specific point in time and is based on information believed to be reliable. No representation or warranty is made concerning the accuracy of any data compiled herein In addition, there can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Any statement non-factual in nature constitutes only current opinion which is subject to change. These materials are provided for informational purposes only and do not constitute investment advice. Any reference to a security listed herein does not constitute a recommendation to buy, sell, or hold such security. Past performance is no guarantee of future results. The historical returns of any securities and/or sectors mentioned in this commentary are not necessarily indicative of their future performance.