I sat in on a call today with the Wells Fargo CIO on a Wells Fargo Investment Institute market volatility call with several strategists and I took notes and thought I would share with you. Took notes best as I could.
Markets closed – Most indices were down about 3%. Nothing sinister happening, some things unwinding high leverage in the market and asset classes. The catalyst? Middle part of last week, bank of Japan had hawkish meeting and increased rates. Their rates are much lower than the rest of the globe. This caught everyone by surprise, and the Yen went up. With low volatility yen-funded carry trades were the most popular as investors bet Japanese interest rates would remain at rock bottom. The Bank of Japan raised rates for the second time in 17 years in its July 31st meeting and has hinted at more. Carry trade positions has everyone running for door at the same time. Selling pressure from investors who sought to repay their debt in Yen, dragged US equities lower.
The US labor market has softened with recent data. Concerns: Maybe a soft landing not possible, interest rates too high for too long, labor markets mature and consumer spending will go down. The US economy at this point is not tanking, it is only softening. Feds probably behind the curve in interest rate cut, inverted yield no longer exists, ST interest rates at or lower than LT rates.
The average retail investor not moving money, it is the institutional traders doing it as calls are made on hedged positions. Taking back some profit that has been above average.
Equity side - Eye popping numbers. S & P at 5,186, back 500 points or 10%, close to correction territory. First one of 2024. Volatility creates opportunities for disciplined investors. Companies have been planning on this for a couple of years and are strong, softer labor market creates less competition and can make hiring easier. Parts of the economy can take advantage of durable consumption. With sell-off, small caps are now more desirable at distressed level but quality not as good as large cap. Don't overweight, but probably been underweight on small cap prior to this sell off. S & P - Still in uptrend if stay above 5,000 from a technical support level. 5,000 key level to watch. Large CAP Tech – Has exceeded performance but has taken a big hit and now more attractive. The aggressive trades to small cap and financials has unwound itself. Almost 15% in a week. Back to where we were in June prior to the run up. Don't be understated now in your portfolio on this segment. Inflation is coming down, the economy is slowing, people believe Fed Funds Rate is too high. Fixed Income securities - Treasuries - Fear causes fake security in fixed income. Bond yields are not different than the beginning of the day. Treasury yields reflect fear purchasing. Consensus - Feds need to cut rates, can we wait until September? The market is telling us Feds are behind the curve. The Fed is data driven; did not believe they had the data to cut rates. Friday, we had a weak job report, that started the ball rolling. Risk in Fed moving too early, and inflation re-emerges. Monetary policy is a hard game. Some want emergency rate cuts. Rough few days, velocity of move more significant than how far the S & P is down. Fed will do it IF liquidity becomes an issue, no signs of that. Watch the data, weaker than expected employment numbers, more likely than not get to September before rate cut. Over 23 years only 7 emergency meetings. If we arrived here over 3 weeks, no one would be calling for an emergency Fed meeting. Some concern is Feds seeing something worse than what we are seeing? Labor rates impacted that view. Fed Rate cuts take time to work, takes 4 - 6 months for cuts to impact the economy.
Recession vs Soft Landing - Weak labor and economic data has people thinking recession. Bad news previously was seen as good news for rate cuts. Now bad news is bad news. The numbers are lower now than the last recession, not at recession levels for job creation. Inflation peaks during a recession, inflation has been decreasing. Consumers are down shifting on spending, even the wealthy. Bad news is bad news and was a strong knee jerk reaction. Recession is not immediately on the horizon. Labor market and consumer spending must show resiliency for soft landing to work.
Geo-politics - Materiality of Iran's strikes against Israel could impact on a go forward basis. History of Middle East over 20 years is for Iran to heavily arm proxy entities to attack Israel and the US. That all changed in April when Iran attacked Israel with missiles and drones. People believe Iran will strike back; other countries may join Iran to attack Israel at the same time. Iran must be careful in escalating this. It must be on your radar; it will be playing out in the next 2 weeks. The materiality of it could be market moving.
Equities - Don't overreact, not the time to do wholesale portfolio shifts. Be patient. We have seen our highs for the year until after the election. Pull backs in certain segments provide opportunities. First leg down, get a counter rally, pulls people in. Second buy off many times the best time to buy.
Fixed Income - Rally across high quality fixed income, we know Fed rate cuts coming in September. Imperative looking for opportunities to in other asset classes as rates go down and had defensive positions. Don't live only on the short side of the curve.
As growth slows, the market is more likely to get tripped up by something. If labor and unemployment numbers worsen fast, that is a big concern. A drop to a 1.5% growth rate could signal recession. Rate cuts can fuel growth in 2025. If growth slows, go to where growth resides, it will not be widespread in the economy.
Markets closed – Most indices were down about 3%. Nothing sinister happening, some things unwinding high leverage in the market and asset classes. The catalyst? Middle part of last week, bank of Japan had hawkish meeting and increased rates. Their rates are much lower than the rest of the globe. This caught everyone by surprise, and the Yen went up. With low volatility yen-funded carry trades were the most popular as investors bet Japanese interest rates would remain at rock bottom. The Bank of Japan raised rates for the second time in 17 years in its July 31st meeting and has hinted at more. Carry trade positions has everyone running for door at the same time. Selling pressure from investors who sought to repay their debt in Yen, dragged US equities lower.
The US labor market has softened with recent data. Concerns: Maybe a soft landing not possible, interest rates too high for too long, labor markets mature and consumer spending will go down. The US economy at this point is not tanking, it is only softening. Feds probably behind the curve in interest rate cut, inverted yield no longer exists, ST interest rates at or lower than LT rates.
The average retail investor not moving money, it is the institutional traders doing it as calls are made on hedged positions. Taking back some profit that has been above average.
Equity side - Eye popping numbers. S & P at 5,186, back 500 points or 10%, close to correction territory. First one of 2024. Volatility creates opportunities for disciplined investors. Companies have been planning on this for a couple of years and are strong, softer labor market creates less competition and can make hiring easier. Parts of the economy can take advantage of durable consumption. With sell-off, small caps are now more desirable at distressed level but quality not as good as large cap. Don't overweight, but probably been underweight on small cap prior to this sell off. S & P - Still in uptrend if stay above 5,000 from a technical support level. 5,000 key level to watch. Large CAP Tech – Has exceeded performance but has taken a big hit and now more attractive. The aggressive trades to small cap and financials has unwound itself. Almost 15% in a week. Back to where we were in June prior to the run up. Don't be understated now in your portfolio on this segment. Inflation is coming down, the economy is slowing, people believe Fed Funds Rate is too high. Fixed Income securities - Treasuries - Fear causes fake security in fixed income. Bond yields are not different than the beginning of the day. Treasury yields reflect fear purchasing. Consensus - Feds need to cut rates, can we wait until September? The market is telling us Feds are behind the curve. The Fed is data driven; did not believe they had the data to cut rates. Friday, we had a weak job report, that started the ball rolling. Risk in Fed moving too early, and inflation re-emerges. Monetary policy is a hard game. Some want emergency rate cuts. Rough few days, velocity of move more significant than how far the S & P is down. Fed will do it IF liquidity becomes an issue, no signs of that. Watch the data, weaker than expected employment numbers, more likely than not get to September before rate cut. Over 23 years only 7 emergency meetings. If we arrived here over 3 weeks, no one would be calling for an emergency Fed meeting. Some concern is Feds seeing something worse than what we are seeing? Labor rates impacted that view. Fed Rate cuts take time to work, takes 4 - 6 months for cuts to impact the economy.
Recession vs Soft Landing - Weak labor and economic data has people thinking recession. Bad news previously was seen as good news for rate cuts. Now bad news is bad news. The numbers are lower now than the last recession, not at recession levels for job creation. Inflation peaks during a recession, inflation has been decreasing. Consumers are down shifting on spending, even the wealthy. Bad news is bad news and was a strong knee jerk reaction. Recession is not immediately on the horizon. Labor market and consumer spending must show resiliency for soft landing to work.
Geo-politics - Materiality of Iran's strikes against Israel could impact on a go forward basis. History of Middle East over 20 years is for Iran to heavily arm proxy entities to attack Israel and the US. That all changed in April when Iran attacked Israel with missiles and drones. People believe Iran will strike back; other countries may join Iran to attack Israel at the same time. Iran must be careful in escalating this. It must be on your radar; it will be playing out in the next 2 weeks. The materiality of it could be market moving.
Equities - Don't overreact, not the time to do wholesale portfolio shifts. Be patient. We have seen our highs for the year until after the election. Pull backs in certain segments provide opportunities. First leg down, get a counter rally, pulls people in. Second buy off many times the best time to buy.
Fixed Income - Rally across high quality fixed income, we know Fed rate cuts coming in September. Imperative looking for opportunities to in other asset classes as rates go down and had defensive positions. Don't live only on the short side of the curve.
As growth slows, the market is more likely to get tripped up by something. If labor and unemployment numbers worsen fast, that is a big concern. A drop to a 1.5% growth rate could signal recession. Rate cuts can fuel growth in 2025. If growth slows, go to where growth resides, it will not be widespread in the economy.
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