Latest / Markets with Megan: A Quick Financial Markets Update / What are the Drivers Behind August's Wild Market Correction? | Episode 161 | 08-06-24

Transcript

What are the Drivers Behind August's Wild Market Correction? | Episode 161 | 08-06-24 · Markets with Megan: A Quick Financial Markets Update

• 0:01
  Megan Horneman: Well, the month of August has certainly lived up to that negative stigma, where it's one of the worst performing months of the year for equity markets.
• 0:08
  Megan Horneman: It's Tuesday, august 5th, and this is your regular segment of Markets with Megan.
• 0:13
  Megan Horneman: We've seen a lot of volatility in the markets.
• 0:15
  Megan Horneman: Today we're getting a bit of that dead cat bounce that people refer to, where you have a couple days in the market where it's rapidly declining and then it settles down.
• 0:24
  Megan Horneman: You have some buyers come in and the market's up here triple digits today.
• 0:28
  Megan Horneman: We'll see if how long that lasts and if it lasts, but it's not abnormal to see this type of bounce higher after such a dramatic decline over the past couple of days.
• 0:37
  Megan Horneman: So we just want to explain quickly what's happened in the past couple of days, why it's happened and then what we see going forward.
• 0:43
  Megan Horneman: So over the past couple of days we've seen pretty big declines across all global equity markets.
• 0:48
  Megan Horneman: We've seen the VIX jump up to 200%.
• 0:52
  Megan Horneman: We've seen some of those tech names, those magnificent seven.
• 0:56
  Megan Horneman: We've seen also the technology sector as a whole, as well as some of the communication services, those tech growth heavy sectors.
• 1:04
  Megan Horneman: We've seen them drop pretty dramatically and we've seen yields fall as well.
• 1:08
  Megan Horneman: We've seen the 10-year now at a year-to-date low.
• 1:11
  Megan Horneman: These are all things that are not surprising when you see such big volatility in the market.
• 1:16
  Megan Horneman: Now, why has this happened?
• 1:17
  Megan Horneman: Well, starting last week we got the economic report for the labor market and this really spooked investors.
• 1:25
  Megan Horneman: Employment rate jumped up.
• 1:31
  Megan Horneman: This is concerning for the economy.
• 1:32
  Megan Horneman: It's been the last domino of all of the economic dominoes that support our economy.
• 1:34
  Megan Horneman: That hasn't fallen.
• 1:35
  Megan Horneman: We've seen manufacturing, new orders, production, housing, lending conditions.
• 1:41
  Megan Horneman: We've seen all these things fall already over the past 18 months.
• 1:44
  Megan Horneman: But the consumer and the labor market has held up.
• 1:51
  Megan Horneman: The consumer is starting to weaken pretty dramatically.
• 1:52
  Megan Horneman: Confidence is weak, consumer credit card debt is so high.
• 1:54
  Megan Horneman: But now the labor market and that specific report last week really spooked investors.
• 1:59
  Megan Horneman: So we saw this decline really start last week.
• 2:03
  Megan Horneman: Valuations Sometimes it can just be a valuation correction that creates this type of volatility and we have often warned that certain areas of the economy, their valuations are so high.
• 2:14
  Megan Horneman: Technology we're looking at 2001 dot com bubble types of valuations.
• 2:18
  Megan Horneman: Some of the other valuations in these growth year sectors were pricing in the perfect soft landing scenario for the economy and the data we got last week did not justify that.
• 2:29
  Megan Horneman: So again we got some volatility there.
• 2:31
  Megan Horneman: Japan started this off as well, because what's happening in Japan is the Bank of Japan is really trying to support their currency that's just been deteriorating all year, and what investors do not like is when a government or central bank has to intervene in any way, specifically from a currency perspective.
• 2:51
  Megan Horneman: That can have ripple effects around the globe.
• 2:53
  Megan Horneman: So those are really the three things that drove this volatility recently.
• 2:58
  Megan Horneman: What do we think about this?
• 2:59
  Megan Horneman: What do we think going forward?
• 3:01
  Megan Horneman: First of all, we've often said cash is not an enemy.
• 3:03
  Megan Horneman: We've had a lot of cash on the sidelines waiting for opportunities like this.
• 3:07
  Megan Horneman: But also remember, even though it looks so ugly last week from a percentage basis, we're still sitting near some of the highs.
• 3:16
  Megan Horneman: We had some 9, 8, 9% corrections, but we're nowhere near a bear market.
• 3:21
  Megan Horneman: There are some areas that are starting to look attractive.
• 3:24
  Megan Horneman: We'll look and we'll make sure that we weigh those risks versus the reward, and that's something we recommend to any investor.
• 3:32
  Megan Horneman: When you're looking at something that's been very beaten down, you have to make sure that it's rewarding you if you buy it for that risk that you're taking right there.
• 3:41
  Megan Horneman: It's beaten down for a reason.
• 3:43
  Megan Horneman: Now, over the next couple months.
• 3:45
  Megan Horneman: We would say that we think volatility is not behind us.
• 3:48
  Megan Horneman: We think you're going to hear from us a lot more with calls like this on why it's happening and what we're going to do about it.
• 3:53
  Megan Horneman: But we are still in a very negative seasonal period and we're heading up into an election season plus a very uncertain meeting with the Federal Reserve coming in September.
• 4:05
  Megan Horneman: Now, when it comes to the Fed, we are not in the camp that there's going to be an emergency cut.
• 4:09
  Megan Horneman: I know that's been talked about quite a bit.
• 4:11
  Megan Horneman: We think September is fully on the table, but an emergency cut, that's not the Fed's job.
• 4:17
  Megan Horneman: The Fed's job is not to control the equity market.
• 4:19
  Megan Horneman: The Fed's job is to maximize employment and also keep price stability.
• 4:24
  Megan Horneman: And what we do know is that inflation has gotten a lot better.
• 4:27
  Megan Horneman: There's no denying that.
• 4:29
  Megan Horneman: But there still are areas of the economy where inflation is a problem and can be very easy to reignite.
• 4:35
  Megan Horneman: So we think an emergency Fed rate cut is off the table.
• 4:39
  Megan Horneman: The only way that would happen is if you have some massive liquidity crunch, which we're not seeing at all right now in the markets.
• 4:45
  Megan Horneman: That's all that we have today.
• 4:47
  Megan Horneman: We'll be back with lots more this week economic data, as well as just regular market updates, especially if we get some more of this volatility come back after today.
• 4:55
  Megan Horneman: If you liked this podcast, please like it.
• 4:58
  Megan Horneman: Hit that alarm bell, share it with your friends and colleagues, and then, if you want additional Markets with Megan podcasts, we do store them at marketswithmegan.
• 5:06
  Megan Horneman: fm.
• 5:08
  Megan Horneman: Thank you very much.