Over the past week or so, we’ve witnessed significant market volatility, with sharp movements in US and Japanese equities. Let’s delve into the details and explore what might be driving these fluctuations.
Several factors have contributed to the recent market turmoil. As the dust settles, three primary reasons stand out. First, earnings concerns in some major tech stocks, which have propelled the US market higher during the first half of the year, fell short of analysts’ expectations. This discrepancy has created considerable short-term noise. Second, there is growing apprehension that the US economy is decelerating more rapidly than anticipated, heightening the risk of a recession. Third, investors in Japan were caught off guard by recent changes in monetary policy, leading to significant sell-offs.
In the US tech sector, high expectations have led to volatility when earnings reports didn’t quite meet the mark. Despite this, we maintain a positive long-term outlook for these large tech companies, believing that the current noise is temporary.
On the macroeconomic front, there has been a noticeable shift in expectations recently. Analysts had been predicting a slowdown in the US economy, which is evident in the labour market. While job creation remains decent, it’s not as robust as it was six months ago. The possibility of a recession is now a more frequent topic of discussion. However, we currently believe that the US economy will slow without slipping into a recession. This assumption is crucial and will be continually reassessed. We also anticipate that inflation will decelerate enough for the US central bank to start cutting rates in September, but the rate cuts might not be as aggressive as some market indicators suggest.
The volatility in Japan appears to be driven by a combination of monetary policy changes and investors betting against the Japanese yen. These factors have led to sharp market movements, but we believe they do not alter the long-term investment outlook for Japanese equities.
The recent weakness in equity markets has impacted returns over the past few weeks, following a period of low volatility and positive performance. Nevertheless, the benefits of diversification were evident, as bond positions helped mitigate some of the market volatility. While we are closely monitoring US macroeconomic data, we think that some of the recent concerns are overblown. We believe our portfolios are conservatively positioned, providing a foundation for potentially increasing our equity exposure.
It’s easy to “stay the course” when markets are performing well, but it’s more challenging during periods of volatility and uncertainty. However, we continue to believe that it is generally the right approach to look past the short-term noise. Ensuring you are invested in a well-diversified portfolio aligned with your long-term goals remains essential.
You can read Richard’s earlier analysis of the current situation on our blog here.
*Capital at risk. Tax treatment depends on your individual circumstances and may be subject to change in the future.
