What are the Drivers Behind August's Wild Market Correction? | Episode 161 | 08-06-24

This is a Special Edition of Markets with Megan today after the markets experienced an incredibly volatile Monday. Is August truly the most treacherous month for equity markets? In this episode of Markets with Megan, we dissect the recent rollercoaster ride in global equities, marked by a sharp downturn followed by a fleeting "dead cat bounce." We delve into the abyss of plunging tech stocks, a skyrocketing VIX, and dipping yields, all triggered by a labor market report that spooked investors. Additionally, we examine the ripple effects of Japan's currency interventions and the ensuing anxiety among market participants.

Looking ahead, we emphasize the importance of a cautious yet strategic approach, highlighting the value of cash reserves and prudent risk management. With a volatile election season and an unpredictable Federal Reserve meeting on the horizon, our analysis offers insights into potential investment opportunities amidst the turmoil. While the road ahead appears bumpy, we assure you that we are not yet in bear market territory and still have attractive prospects to consider. Tune in to gain perspective on how to navigate what may be challenging in the months ahead.

Well, the month of August has certainly lived up to that negative stigma, where it's one of the worst performing months of the year for equity markets. It's Tuesday, august 5th, and this is your regular segment of Markets with Megan. We've seen a lot of volatility in the markets. Today we're getting a bit of that dead cat bounce that people refer to, where you have a couple days in the market where it's rapidly declining and then it settles down. You have some buyers come in and the market's up here triple digits today. We'll see if how long that lasts and if it lasts, but it's not abnormal to see this type of bounce higher after such a dramatic decline over the past couple of days. So we just want to explain quickly what's happened in the past couple of days, why it's happened and then what we see going forward. So over the past couple of days we've seen pretty big declines across all global equity markets. We've seen the VIX jump up to 200%. We've seen some of those tech names, those magnificent seven. We've seen also the technology sector as a whole, as well as some of the communication services, those tech growth heavy sectors. We've seen them drop pretty dramatically and we've seen yields fall as well. We've seen the 10-year now at a year-to-date low. These are all things that are not surprising when you see such big volatility in the market.

Now, why has this happened? Well, starting last week we got the economic report for the labor market and this really spooked investors. Employment rate jumped up. This is concerning for the economy. It's been the last domino of all of the economic dominoes that support our economy. That hasn't fallen. We've seen manufacturing, new orders, production, housing, lending conditions. We've seen all these things fall already over the past 18 months. But the consumer and the labor market has held up. The consumer is starting to weaken pretty dramatically. Confidence is weak, consumer credit card debt is so high. But now the labor market and that specific report last week really spooked investors. So we saw this decline really start last week.

Valuations Sometimes it can just be a valuation correction that creates this type of volatility and we have often warned that certain areas of the economy, their valuations are so high. Technology we're looking at 2001 dot com bubble types of valuations. Some of the other valuations in these growth year sectors were pricing in the perfect soft landing scenario for the economy and the data we got last week did not justify that. So again we got some volatility there. Japan started this off as well, because what's happening in Japan is the Bank of Japan is really trying to support their currency that's just been deteriorating all year, and what investors do not like is when a government or central bank has to intervene in any way, specifically from a currency perspective. That can have ripple effects around the globe. So those are really the three things that drove this volatility recently.

What do we think about this? What do we think going forward? First of all, we've often said cash is not an enemy. We've had a lot of cash on the sidelines waiting for opportunities like this. But also remember, even though it looks so ugly last week from a percentage basis, we're still sitting near some of the highs. We had some 9, 8, 9% corrections, but we're nowhere near a bear market. There are some areas that are starting to look attractive. We'll look and we'll make sure that we weigh those risks versus the reward, and that's something we recommend to any investor. When you're looking at something that's been very beaten down, you have to make sure that it's rewarding you if you buy it for that risk that you're taking right there. It's beaten down for a reason.

Now, over the next couple months. We would say that we think volatility is not behind us. We think you're going to hear from us a lot more with calls like this on why it's happening and what we're going to do about it. But we are still in a very negative seasonal period and we're heading up into an election season plus a very uncertain meeting with the Federal Reserve coming in September.

Now, when it comes to the Fed, we are not in the camp that there's going to be an emergency cut. I know that's been talked about quite a bit. We think September is fully on the table, but an emergency cut, that's not the Fed's job. The Fed's job is not to control the equity market. The Fed's job is to maximize employment and also keep price stability. And what we do know is that inflation has gotten a lot better. There's no denying that. But there still are areas of the economy where inflation is a problem and can be very easy to reignite.

So we think an emergency Fed rate cut is off the table. The only way that would happen is if you have some massive liquidity crunch, which we're not seeing at all right now in the markets. That's all that we have today. We'll be back with lots more this week economic data, as well as just regular market updates, especially if we get some more of this volatility come back after today. If you liked this podcast, please like it. Hit that alarm bell, share it with your friends and colleagues, and then, if you want additional Markets with Megan podcasts, we do store them at marketswithmegan. fm. Thank you very much.