July: Market Wrap
Table of Contents
July: Market Wrap
6 Aug 2024
July - the calm before the storm
July was a good month for markets, with global stock markets delivering a 4% return. Unfortunately, the situation has deteriorated in the first few days of August, as a disappointing jobs report has heightened concerns about a potential U.S. recession, which could, in turn, impact the global economy.
Writing this on 6 August, US markets have fallen by 6% over the past 2 days and the Japanese market has been especially beaten up, falling by over 20% in the past few days, the worst performance since the market crash in 1987.
Returns as at 31 July 2024
Source: Factset: Kōura returns are pre-tax and post-fees. Returns over 12 months are annualised. Past performance is not necessarily an indicator of future performance and return periods may differ. Local market returns use the relevant markets indices; NZ Equities uses NZX50 index; US Equities uses S&P500 index; Rest of World uses MSCI EAFE Index; Emerging Markets uses MSCI Emerging Markets Index, Fixed Interest uses Bloomberg Aggregate NZ Composite Bond Index. Bitcoin return is the USD change in price of Bitcoin.
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The catalyst for the carnage – the US jobs report
On Friday 2nd August, the US Department of Labour released its monthly jobs report. The report showed a material slowdown in hiring and an uptick in the unemployment rate. The unemployment rate spiked to 4.3%, the highest rate in 3 years. An increase in the unemployment rate of this magnitude has historically indicated that we are heading into recession. The big question on everyone's minds is whether this will be the case again or whether this is yet another rule that should be thrown out in the post-COVID world.
The negative job report was also accompanied by negative manufacturing data in the US and slightly weaker-than-expected earnings from Amazon and Microsoft.
Investors have been nervous on the markets for a while, executing a market crash and this confluence of bad news was all the spark that was necessary to set off a wave of selling.
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Why has Japan been so badly hit
The Nikkei is down 20% over the past few days with a massive 12% drop on Monday 5th August, the largest single-day drop since 1987 (the previous peak of the Japanese market). The Japanese market has been one of the best performers in the world over the past 2 years driven by a combination of a very weak yen and increased confidence in the Japanese manufacturing complex who benefit from a weaker yen.
Fears of a US recession and a sharp drop in interest rates in the US have reversed this. The yen has strengthened by almost 13% over the past few weeks, investors are now taking money out of Japan fearing further appreciation of the currency, and the stock market is suffering from both reduced global buyers and the prospect that a higher yen will lead to a slowdown in manufacturing earnings growth.
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Why is the New Zealand market holding up so well
The New Zealand market has remained very stable through this carnage only falling 1.1% over the past few days which is even more amazing considering it was one of the strongest global performers over the past few months.
As we have talked about many times, the NZ market is very different to other global markets, it is largely interest-rate driven and does not have any of the high-growth tech names that we see elsewhere in the world. Without the rally over the past few years (the market has effectively been dead) investors are not looking for a correction.
The NZ market has also been supported by takeover activity. Recent bids for The Warehouse and retirement operator Arvida have demonstrated that the market is undervalued and if public markets are not willing to pay fair value, private equity is waiting and willing to pounce.
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What does all of this mean for interest rates?
Interest rate forecasts are tumbling. Economists in the US are now expecting a 1.0 – 1.5% fall in interest rates over the rest of the year with cuts starting in August. The broad consensus is that the US Federal Reserve has let higher interest rates stay for too long.
Here in New Zealand, the interest rate path is made slightly murkier by the lack of monthly reporting and the tax cuts which are coming into effect on 1 August. The economy is slowing, and we are in a per capita recession, though we suspect the Reserve Bank will be waiting to see the impact of the tax cuts before making a judgement of when and how fast to cut interest rates. We think a 0.5% cut in November is the most likely course of action, though the recent turmoil in the US will be making the Reserve Bank slightly more nervous.
Cryptocurrencies are taking an even bigger hit—what's happening?
Bitcoin has dropped 16% in the past few days and Ether is down over 20%. Unfortunately, these are just more symptoms of the risk-off sentiments. As we know, when the markets catch a cold, Crypto often catches pneumonia and that is what we are seeing here.
Cryptocurrencies have limited liquidity, so even a small amount of selling pressure can quickly drive prices down. That's exactly what we're witnessing right now.
Conclusions
It is impossible to know what is happening next. Markets have had an amazing run and this latest correction, while scary only brings us back to where we were in April / May. This is a correction that has been widely anticipated and expected by many in the markets.
The good news out of the carnage over the past few days is that interest rates are likely to fall faster as Central Banks look to protect economies. An accelerating slowdown in the US will make the Reserve Bank of New Zealand more nervous, and they may reduce interest rates sooner and faster as a result.
For our growth portfolios, the fundamentals have not changed, we know that markets do not travel in straight lines, though over time they do go up. The key to being a successful investor is to understand and expect the volatility and not panic.