Manager Insights – September 2024
Market Overview
The third quarter of 2024 was marked by heightened volatility, particularly within the technology sector. This sector, often led by what has been dubbed the “Magnificent Seven”—Apple, Microsoft, Alphabet (Google), Amazon, Nvidia, Meta Platforms, and Tesla—faced significant market challenges.
Following a period of strong performance, these key stocks experienced a sharp decline in early August, losing a cumulative $800 billion in market value. This downturn was largely attributed to concerns that valuations had become excessively inflated, drawing comparisons to the DotCom bubble of the late 1990s. The sell-off was broad-based, affecting not just these companies but the market as a whole.
On August 6th, the release of an unexpectedly weak U.S. employment report exacerbated market fears, raising concerns about a potential recession. The unemployment rate reached a post-pandemic high, prompting speculation that the Federal Reserve may have kept interest rates elevated for too long, potentially jeopardizing a “soft landing” for the economy. This situation triggered the Sahm Rule, a recession indicator that suggests a downturn may be imminent when the three-month moving average of the national unemployment rate rises by 0.50 percentage points or more relative to its low over the previous 12 months.
Adding to the market turbulence, the Bank of Japan’s decision on July 31st to raise interest rates to a 15-year high fueled the unwinding of the yen-funded carry trade. This move, combined with U.S. recession fears, contributed to significant market instability in early August.
Market Stabilization and Outlook
In response to these developments, on August 7th, the Bank of Japan’s deputy governor announced that the central bank would refrain from further interest rate hikes amid unstable market conditions. This statement, along with better-than-expected U.S. jobless claims data and considerations around the impact of immigration and Hurricane Beryl on the employment report, helped to alleviate market fears, leading to a partial recovery.
By mid-August, panic had subsided, and the Cboe Volatility Index (VIX), a key measure of market anxiety, retreated from its four-year high. The S&P 500 rebounded, rising 3% from its recent lows. However, historical trends suggest that markets may remain unsettled for some time, as periods of heightened volatility often persist for several months.
Our Response and Strategic Positioning
We maintained a significant position in the technology sector, which has delivered strong returns for our investors. In anticipation of a potential market correction, we began reducing our exposure to this sector during the second quarter as part of our regular portfolio management practices.
Despite the recent market volatility, the technology sector’s movements remained within its typical range of fluctuations. We have approached the news of a possible recession with caution, as our analysis indicates that market fundamentals remain sound, with the exception of the unwinding of the yen carry trade.
Our long-term outlook remains positive, though we anticipate continued volatility into early next year. We have made only minor adjustments to our portfolio and remain confident in our current positions. As always, we advise our investors to stay calm and avoid reacting to short-term market noise. Historical data demonstrates that remaining invested through market cycles and recessions typically yields better long-term outcomes, as selling during downturns can lead to missing out on subsequent recoveries.