| The significant market sell-off that transpired over the last week has likely captured your attention and may have even brought on a sense of anxiety. We felt it was important to send a short note today to help you put some context around what is happening.
So, what is happening? Last week, the U.S. printed some soft economic data (e.g. Friday’s payrolls and unemployment data), as well as some disappointing news and forecasts from large tech companies, particularly Intel. We also heard a more accommodative tone from monetary policymakers, which resulted in a sudden realization that we may be in store for a harder economic landing than was previously expected. This news prompted a collective flight-to-safety from investors and a sharp decline in the global equity markets. The equity sell-off also appears to have been exacerbated by speculative investors (e.g. hedge funds) unwinding levered trades aimed at capitalizing on interest rate and volatility differentials across global markets. We don’t want to take you down a rabbit hole trying to explain the ‘Carry Trade’ therefore, we suggest you google ‘Carry Trade’ to help you understand what happened to global markets recently, and more specifically the Japanese Nikkei index.
While the sell-off may be justified in certain cases where irrational exuberance had elevated valuations beyond levels that could be fundamentally justified, (especially in AI beneficiaries without a strong competitive moat) we believe it has caused many other parts of the market that were already trading at attractive valuations to dislocate even further.
We are not at all surprised by the sudden realization by market pundits that the global economy may not be able to pull off the “no landing”, or possibly even a “soft landing” that we feel has been priced into the markets over that past year or so. While it can be difficult to shun off the psychological forces that induce a sense of stress and uncertainty during times like this, we remain positive about the fundamental long-term prospects of the broad equity markets.
We found the below chart to be very powerful given that many of our clients are in their early 60s. During the period shown, we have experienced wars, recessions, terrorist attacks, the pandemic, etc. We think the chart speaks for itself. We cannot predict how one’s portfolio will respond in the coming days, weeks, or even months, but as we have said before…Investing is not won in the short term. It is won over decades. |
