August 2024 MPS Market Review

• Global Stock markets, in aggregate, carved out marginal gains across August, however, this net performance masks far higher levels of volatility beneath the surface.
• Beginning in late July, before accelerating in early August, stock markets came under intense selling pressure as fears of US recession climbed.
• Price falls were compounded by the unwinding of leveraged ‘Yen Carry Trades’
• Such ‘Trades’ are executed by (a segment of) investors who secure low-cost borrowing to fund investments in higher returning assets; at least that is the strategy.
• The yen is a popular source of funding given Japan’s low interest rate policy, however, as the yen appreciates so too does the debt repayment burden. To prevent more meaningful losses positions are closed via the sale of investments to then repatriate into yen and repay the borrowing.
• Such a process can have vicious feedback loops, however, as asset sales and yen purchases can beget further asset sales to payback increasingly expensive yen borrowing.
• This punishing cycle may go someway to explain the remarkable price action seen in early August. We would reassert, however, that US recessionary fears were the likely catalyst for such a frenzy.
• Recessionary concerns have risen over concerns ‘cracks’ in US labour markets are widening. Though aggregate employment data remains robust, the level of hiring is decelerating, and layoffs are accelerating; a combination sending unemployment trends firmly in the wrong direction.
• Though many factors will be at play, deteriorating momentum within US consumption will be elevating market nerves.
• Consumers can choose to spend from savings, current earnings or borrowing, with all 3 suggesting the game is almost up for this cycle’s expansion.
• Though very difficult to get a confident read on savings, most analysis points to the near depletion of pandemic handouts, certainly within lower to middle income groups, who have the highest propensity to spend.
• Wage inflation is continuing its trend lower, suggesting a diminishing tailwind from current earnings.
• As for borrowing, higher interest rates negate the appeal for consumers to take on more debt, whilst rising defaults in credit cards and consumer loans, discourage banks from offering more too.
• This diminishing confidence in the US consumer and, therefore, the durability of a US expansion, likely encouraged many investors to sell down their equity holdings.
• Despite such initial concerns, it is not for certain a US recession will arrive within the coming 6-12 months, as US consumer fire power may yet prove more resilient than many anticipate.
• Indeed, not far into the month of August and US ‘Jobless Claims’ data served to restore confidence in US labour markets, postponing any apparent risk of imminent recession.
• Avoidance of recession (at least for now) remains at the centrepiece of the MPS investment strategy, believing growth can remain resilient as consumer and business confidence can be buoyed by fading inflation and the onset of a rate cutting cycle.
• On this point, investors can take comfort from the increasingly dovish tones from the US Central Bank, signalling with some intent that interest rate cuts will begin in September.
• These easing efforts follow the lead from Canada, Switzerland, Sweden the Eurozone and (now) the UK. Such coordination may also bolster the impact of more accommodative policy, extending the ‘Goldilocks’ environment for a few quarters yet.
• Reflecting upon bond markets and the continuation of disinflationary trends, catalysed by weakening (though not collapsing) labour markets, is delivering a return to form for the much-maligned asset class; reminding investors of the diversification role this asset class offers.
• It is, however, a troubling time when volatile single data points (subject to revision) can drive markets so firmly in either direction.
• Investors should brace themselves for further volatility, as markets fret between extremes of soft-landing euphoria and recession.
• Recognising how uncertain the outlook remains, as well as our philosophical belief in the need for humility when investing, MPS portfolios strive to seek appropriate levels of diversification to meet the investment challenges ahead.
• Stay safe, stay well, and please get in touch if you wish to discuss any part of the Invesco MPS strategy further.

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