Manager Comments – 14 August 2024
Market Overview
The third quarter of 2024 has been marked by heightened volatility, particularly within the technology sector. This sector, often led by what has been termed the “Magnificent Seven”—Apple, Microsoft, Alphabet (Google), Amazon, Nvidia, Meta Platforms, and Tesla—has recently faced significant market challenges.
Following a period of strong performance, these key stocks saw a sharp decline in early August, with a cumulative loss of approximately $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, leading to 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 in 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 under unstable market conditions. This statement, alongside better-than-expected U.S. jobless claims data and the possible impact of immigration and Hurricane Beryl on the employment report, helped to calm market fears and led to a partial recovery.
By mid-August, panic had subsided, and the Cboe Volatility Index (VIX), a key measure of market anxiety, had retreated from its four-year high. The S&P 500 rebounded, rising by 3% from its recent lows. However, history suggests that markets may remain unsettled for some time, as periods of heightened volatility tend to persist for several months.
Our Response and Strategic Positioning
We have maintained a significant position in the technology sector, which has delivered strong returns for our investors. Anticipating 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 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 expect continued volatility into early next year. We have made only minor adjustments to our portfolio and are confident in our current positions. As always, we advise our investors to remain calm and avoid reacting to short-term market noise. Historical data shows that staying invested through market cycles and recessions typically yields better long-term outcomes, as selling during downturns can lead to missing out on subsequent recoveries.
It is worth noting that even amidst recent market volatility, our returns have consistently outperformed the ASISA benchmarks