Stock market selloff August 5, 2024

What happened on Monday, August 5, 2024?

• Japanese equities fell by almost 11% in CAD terms.
• US markets followed, with the S&P 500 down 3.1% (CAD).
• The TSX didn’t trade due to the public holiday in Canada, but international equities, as measured by the MSCI EAFE, fell 3.8% (CAD).

Primary reasons behind the selloff

• There were increased concerns about a recession in the US. Why?
  • Last Friday’s jobs report showed a slowdown in job growth in July, with only 114,000 jobs added compared to the expected 175,000. This was also significantly lower than the monthly average of 215,000 jobs added over the last 12 months. As a result, the unemployment rate rose to 4.3%, compared to 4.1% in June. While still relatively low, the uptick represents an acceleration in the softening of the labour market.
  • After leaving interest rates unchanged last week, there is now a perception that the US Federal Reserve (the Fed) is moving too slow on cutting interest rates. The prevailing data supported the Fed’s caution, but the weak jobs report has put a spotlight on the bank’s rate policy, especially given past criticism of how slow they were to raise rates back in 2022 (remember the use of the term “transitory inflation”?).

• Weak earnings reports from tech giants such as Amazon and Alphabet have put a dampener on the Magnificent 7 story and have given rise to questions as to if and when the spending in AI-related investments (which has fuelled the Mag 7’s rise over the past 18 months) will translate to growth (and profits).

• Reversal of Japan carry trade.
  • The Bank of Japan raised its interest rate last week for only the second time in 17 years—the first was four months ago.
  • This led to the yen (JPY) extending a rally against the USD, as, on a relative basis, Japanese rates are now more attractive than before the rate hike.

• • Given this trajectory for Japan rates, many investors are unwinding the so-called “carry” trade (essentially where one borrows at a lower rate to invest at a higher rate). This contributed to the selloff in Japanese equities on Monday.

Our thoughts and the impact on ATBIM funds

It’s important to reiterate that equity market downturns, like Monday’s event, happen occasionally. For example, the S&P 500 fell by 4% on May 18, 2022. Markets also often overreact over the short term. While the data indicates the US economy is softening, given the latest job report numbers, an unemployment rate of 4.3% is still low by historical standards. The Fed has emphasized its data-driven approach to policy, but the market action on Monday may have given more impetus to the expected rate cut in September.

Thankfully, stability has returned to the markets today, with the Japanese equity market rebounding by 9.4% (CAD) and the US (and other equity markets in general) displaying a semblance of normality. For example, the VIX, an indicator of the market’s expectations regarding volatility, spiked up to almost 40 on Monday but has come back down today (with markets still open as of this writing).

Given that Monday was a holiday in Canada, we have yet to determine the full impact on the Compass Portfolios and ATBIS Pools. Concerning Japan exposure, our funds are underweight, so a downturn in Japan would actually benefit the funds relative to the benchmark.

It’s worth remembering how our investment philosophy has worked well during these volatile times, as reflected in the strong performance of our growth-oriented portfolios over the last month. In particular, our focus on (a) the longer term, (b) not chasing the latest fad or trend, (c) downside risk management, and (d) staying true to our core investment beliefs has contributed to the resilience and steady performance in the portfolios.