Investors are braced for a rocky outlook after Asian markets tanked last week after bad jobs numbers spooked Wall Street and triggered fears of recession, and as tensions rise in the Middle East.
Global markets have taken a significant step back as the week gets underway with the Japanese market in particular suffering heavy falls.
US jobs a tiding of recession?
The causes of the falls take some untangling. Friday 2 August brought some disappointing jobs data in the US with American employers adding only 114.,000 jobs in July – short of the 180,000 additions expected by economists, and a marked decrease from the 179,000 added in June.
This led to fears that the US economy was slowing and could even fall into recession. This feeling was compounded because the US Federal Reserve (Fed) had decided just days earlier to hold interest rates instead of cutting them - adding to a sense that the Fed may have moved too slowly in heading off a downturn.
Consensus is now building that the Fed may have to move faster and deliver a half-percentage-point rate cut at its September meeting. The market now expects US rates to end 2024 in the 4.00% to 4.25% range.
The heavy falls in Japan’s stock market may be explained by the fact that its central bank has just raised rates, meaning an increasing divergence between rates there and the rest of the world. That puts upwards pressure on the value of the Yen, something which tends to squeeze Japanese shares.
Tech squeeze
All this has happened as the largest tech companies, which have been the driver of returns for so long, have been buffeted by mixed earnings results. Results from Google, Microsoft, and Amazon all disappointed. Apple reported a quarterly rise in revenues but saw only a small rise in its share price. Of all the Magnificent seven companies only Apple and Tesla saw a rise in their value across earnings season.
It isn’t only stocks that have been falling. Bitcoin is now down almost 18% over the past five days. Meanwhile, oil is trading near eight-month lows, at US$77 a barrel, with the market seemingly more worried about a global slowdown that it is fighting in the middle east which could disrupt supply.
Why the smart money won’t be panicking
The coming weeks could be difficult for many assets as this round of uncertainty plays out. Stock markets have been enjoying a strong year of gains - the MSCI World Index is about 14% above where it was 12 months ago - and the current falls are unwinding some of that.
Some of the assets that have driven returns most strongly are now very highly valued and a de-rating has been forecast by many.
During times like this it makes sense not to rush investment decisions, which risks compounding losses. Those investing for the long-term with several years until they need their money - should not necessarily fear market falls. It may seem counterintuitive but falls can be helpful to your overall return because they give you the chance to buy assets at lower valuations. The trick is to stay on course and give assets the chance to recover.
And they do tend to recover.
