'Unwinding' of the bulls!

August 13tg, 2024

RECAPPING LAST WEEK

U.S. equities fought back from a brutal drop of more than 4% at Monday’s open to finish only
moderately lower, amid the highest volatility levels seen since the 2008 financial crisis and 2020
pandemic. Panic commenced when Japan’s stock market plunged 12% last Sunday evening, as the
Bank of Japan’s recent interest rate hike and subsequent rising yen caused traders to begin
unwinding the so-called “carry trade” that was built on years of negative rates in Japan.

The S&P500 and Nasdaq Composite indices both ended only marginally negative, while the Russell 2000 slid 1.4%. The Cboe Volatility index soared above 65 in the premarket last Monday but quickly
retreated into the low-20s by week’s end. However, readings in the 20s still represent the most
volatility investors have seen since the regional banking crisis in March 2023. S&P500 sector
performance was split, while crude oil prices rose nearly 4% as Mid-East tensions escalated. The 10- year U.S. Treasury yield plummeted to 3.67% as investors fled to the safe-haven of government
debt, before bouncing back to 3.94% despite weak 10- and 30-year auctions.

Concerns about rising recession risks and an unraveling in the U.S. labor market were somewhat countered by a rise in the Atlanta Fed GDPNow Q3 estimate to +2.9% and a drop in weekly jobless claims. These data points led to a strong rally in equities and interest rates on Thursday. However, economists will be closely monitoring incoming data for any signs of slowing economic growth. Some are calling for an inter-meeting rate cut, but the Federal Reserve is unlikely to take such action unless credit market conditions worsen. In other news, U.S. consumer borrowing increased less than expected in June, but overall balances and delinquencies continued to grow as inflation ate into Americans’ buying power.

The Fed’s Senior Loan Officer Opinion Survey revealed easing lending standards for
commercial and industrial loans in the second quarter, although consumer loans were somewhat
tighter. Overseas, the Summary of Opinions from the Bank of Japan’s recent meeting suggested
that board members did not expect its rate hike to be large enough to disrupt global markets. On
Wednesday, Deputy Governor Uchida attempted to reassure investors by saying that the BOJ won’t
raise rates further while markets are unstable. In China, export growth slowed unexpectedly in July,
signaling potential cooling global demand. Consumer prices in the world’s second-largest economy rose less than forecast when stripping out volatile food prices, while producer prices fell 0.8% YoY. Finally, the Reserve Bank of Australia left interest rates unchanged at its August meeting, warning that pricing in rate cuts was premature given that inflation remained problematic.

THE WEEK AHEAD

Some of the worries that the U.S. economy was on the verge of recession eased last week, but investors remain wary of the possibility given that the Fed has been slow to lower interest rates due to stubborn inflation. Wednesday’s CPI report, arriving on the heels of last week’s extraordinary market volatility, has the potential to ignite more chaos on any upside—or even downside—surprises. The producer price report comes a day earlier, perhaps providing a preview of what to expect on the consumer side. U.S. retail sales will be released on Thursday morning, along with earnings from retail giant Walmart. Both numbers could be influential in addressing economic slowdown concerns. The rest of the U.S. calendar includes the Empire State and Philly Fed manufacturing indices, industrial production, housing starts, and August’s preliminary consumer sentiment reading along with inflation expectations.

On the international calendar, the main event will be China’s industrial production and retail sales figures, which arrive Thursday evening amid the poor trade balance data from last week. A busy week for data awaits in the UK, with employment and wage numbers, CPI, a GDP update, and retail sales all shaping expectations for the Bank of England’s next move. Last of all, Japan releases second quarter GDP on Wednesday evening, which is expected to rebound but not fully offset the 0.7% contraction from Q1.

(source: Charles Scwab)

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Definitions

Annualized Return: The rate at which an investment grows each year over the period to arrive at the final valuation.
Bear Market: A decline of at least 20% from the market’s high point to its low.
Beta: A measure of how an individual asset moves when the overall stock market increases or decreases.
Correlation: A measure of the extent to which two variables are related.
Dividend Yield: The dividend yield or dividend-price ratio of a share is the dividend per share, divided by the price per share. It is also a company’s total annual dividend
payments divided by its market capitalization, assuming the number of sharesis constant.
Developed Markets: A country that is most developed in terms of its economy and capital markets. The country must be high income, but this also includes openness
to foreign ownership, ease of capital movement, and efficiency of market institutions.
Emerging Markets: A country that has some characteristics of a developed market but does not fully meet its standards. This includes markets that may become
developed marketsin the future or were in the past.
GrowthFactor Stocks: Growth stocks are companies expected to grow sales and earnings at a fasterrate than the market average.
LargeCap Stocks: Shares of publicly traded corporationswith a market capitalization of $10 billion or more.
LTM: An acronymfor”Last Twelve Months”or the past one year.
NTM:An acronymfor”Next Twelve Months” or the next one year.
Price Return: The rate of return on an investment portfolio, where the return measure takes into account only the capital appreciation of the portfolio, not including
income generated in the form of interest or dividends.
Total Return: Return on a portfolio of investmentsincluding capital appreciation and income received on the portfolio.
Small Cap Stocks: Small-cap stocks are shares of companieswith a market capitalization of less than $2 billion.
Standard Deviation: In statistics, the standard deviation is a measure of the amount of variation or dispersion of a set of values. A low standard deviation indicates the
valuestend to be close to the historical average of the data set, while a high standarddeviationindicatesthe current value is outside of the historical average range.
Value Factor Stocks: Stocksthat are inexpensive relative to the broad market based on measures of fundamental value (e.g., price to earnings or price to book).

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