LEVATUS Investments | Market Correction Fueled by - Seasonals, Sentiment, and Leverage
August 2024 started with a swift drawdown in financial markets. As with many such corrections, a major contributor was leverage.
Susan Dahl | CEO LEVATUS
Photo by Sergei Gussev
The spark that triggered August’s market swoon ignited in Japan, and was connected to leverage that has accumulated during the country’s many years of ultra-low borrowing costs.
August 2024 | Surprise from Japan
From a technical perspective, the swift drawdown in markets during the past week is not surprising. The set up:
Very bullish sentiment – lots of people on one side of the boat
Expensive stock prices – the price for a dollar of earnings in the market is high
Mixed earnings season – high expectations for third and fourth quarter earnings left some disappointed
Leverage
On top of this, the goldilocks, soft economic landing scenario, came into question as some economic releases on employment weakened.
The trigger for the volatility, however, was a ‘surprise’ increase in interest rates by the Bank of Japan. What!? Why does this small event from far across the world impact US stocks? The biggest reason is leverage - many hedge funds, banks, and governments borrowed in Yen because the rates on loans there were extremely inexpensive. Policy rates in Japan are still .25% and the rate on the 10-year bond is only about 1%. With the proceeds of these loans, they purchased growth stocks, higher yielding assets, more risky growth assets. When rates went up unexpectedly in Japan, this leverage became less attractive, and some decided (and some received margin calls and were forced) to sell the assets they bought to pay back the loans.
Where do we stand now? August through October is often a seasonally volatile period for stocks, and we do not see strong evidence that this year will be any different. While a bounce from the recent lows is likely in coming days, we expect the next couple of months to see more ups and downs. This type of environment is an excellent one for dollar cost averaging and building positions. Properly sized Funding accounts are important for folks who will need to draw liquidity during this period. Even in the midst of the volatility this past week, the rotation away from the narrow technology leadership that has defined the past couple of years, toward a broader group of stocks to include dividend-oriented stocks and small and medium sized stocks continued. We expect economic conditions will continue to advance this rotation..
While the economic news injected some additional uncertainty in the past week, on the whole the slight weakening in some areas was not overwhelming. Other areas like the service sector saw a strengthening. Importantly, productivity picked up substantially. Productivity is one of the most important contributors to non-inflationary long-term growth potential.
Our recent research note – Portfolio Construction in a Complex World – gives a more detailed view of the economic and market backdrop. Please reach out if you have any questions.
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ABOUT THE AUTHOR
Susan Dahl is a seasoned executive, industry leader, and dedicated client advisor, with over thirty years of international and domestic financial experience. Susan is known for her ability to unravel complex questions, and has a steadfast commitment to well designed process. This background has translated directly into her work on investment process design for private wealth clients, as well the industry leading LEVATUS Integrated Wealth Service model; a modern design that addresses the many ways financial decision making impacts financial security, relationships, and sense of purpose across generations.. A deep and diverse background that extends from global investing, to risk management, to process development and planning, has laid the groundwork for an advisory solution that asks more of wealth. Susan shares some her most recent work in this TEDx , Can Happy Make You Money?
August 2024 started with a swift drawdown in markets. As with many such corrections, a major contributor was leverage.