To our clients—
A sharp sell-off in stocks is in its third day today, in a remarkable about-face from a strong rally during and after a fairly low-key and market-friendly Federal Reserve meeting just last Wednesday. The main trigger was Friday morning’s monthly jobs report, which indicated a weaker-than-expected 114,000 jobs added in July, sparking fears of an economic slow-down and possible recession. Stocks are down more than 5% over the three days, trimming year to date gains to upper single digits, while more pronounced declines have hit the tech/AI space as well as Japan’s tech-centric stock market (the latter off about 25% from a July 11th all-time high), both of which had enjoyed relative strength earlier in the year. Bonds have gained markedly as traders seek a safe haven.
Thayer portfolios will be impacted, depending of course on how markets close today and later this week. Last week, balanced (50/50) accounts were about unchanged, with the stock piece off 2% but offset by similar gains in bonds and gold. Year-to-date gains at the end of last week in typical Thayer portfolios stood in the mid-to-upper single digits, more in the 6-7% range for balanced accounts and one or two percentage points higher in more stock-heavy accounts. Bonds are again up early Monday, with stocks sharply lower. Volatility is very elevated, again having been relatively sedate only a few days ago.
Given that stock valuations overall have been elevated and sentiment around AI had seemed a bit too universally positive, we don’t view this recent sharp sell-off as particularly unhealthy. And with volatility highly elevated, we would guard against an inclination to make rash decisions and abandon equity or risk exposure, which would crystalize the recent losses. Generally, we would recommend staying the course at present, keeping the longer-term objective in mind, and trying to keep emotions in check. Portfolios are well diversified, and this continues to be essential. We have for some time been expecting greater volatility, and continue to feel this way as a contentious and seemingly more competitive election approaches.
The main current fear, triggered by the job report, is an unexpectedly quick economic downturn and a sense that the Fed has been too slow to cut policy interest rates. At the Wednesday meeting, rates were held at 5.25-5.50%, where they have sat for the past year, while Jay Powell teed up a .25% cut for the next meeting in mid-September. Asked about the possibility of a .50% cut, Powell said that wasn’t “something we’re thinking about right now.” That clearly changed only two days later, with the Street now widely expecting not only a .50% cut in September but multiple cuts over the next several months.
In our July quarterly comments, we detailed portfolio changes based on our view that the economy would head for a downturn, including reducing small capitalization exposure given its particularly high economic sensitivity. (Small company defaults have indeed ticked up.) We also moderately increased bond duration based on potentially lower interest rates, including at the Fed policy level. We feel this continues to be appropriate. We do maintain some wariness about a reaction to a job report that was, yes, under expectations, but not to a great degree and in fact within a roughly 100,000 margin of error that is always subject to future revisions.
We will be back as events dictate and/or our thinking changes.
A Quick and Sharp Sell-Off
To our clients—
A sharp sell-off in stocks is in its third day today, in a remarkable about-face from a strong rally during and after a fairly low-key and market-friendly Federal Reserve meeting just last Wednesday. The main trigger was Friday morning’s monthly jobs report, which indicated a weaker-than-expected 114,000 jobs added in July, sparking fears of an economic slow-down and possible recession. Stocks are down more than 5% over the three days, trimming year to date gains to upper single digits, while more pronounced declines have hit the tech/AI space as well as Japan’s tech-centric stock market (the latter off about 25% from a July 11th all-time high), both of which had enjoyed relative strength earlier in the year. Bonds have gained markedly as traders seek a safe haven.
Thayer portfolios will be impacted, depending of course on how markets close today and later this week. Last week, balanced (50/50) accounts were about unchanged, with the stock piece off 2% but offset by similar gains in bonds and gold. Year-to-date gains at the end of last week in typical Thayer portfolios stood in the mid-to-upper single digits, more in the 6-7% range for balanced accounts and one or two percentage points higher in more stock-heavy accounts. Bonds are again up early Monday, with stocks sharply lower. Volatility is very elevated, again having been relatively sedate only a few days ago.
Given that stock valuations overall have been elevated and sentiment around AI had seemed a bit too universally positive, we don’t view this recent sharp sell-off as particularly unhealthy. And with volatility highly elevated, we would guard against an inclination to make rash decisions and abandon equity or risk exposure, which would crystalize the recent losses. Generally, we would recommend staying the course at present, keeping the longer-term objective in mind, and trying to keep emotions in check. Portfolios are well diversified, and this continues to be essential. We have for some time been expecting greater volatility, and continue to feel this way as a contentious and seemingly more competitive election approaches.
The main current fear, triggered by the job report, is an unexpectedly quick economic downturn and a sense that the Fed has been too slow to cut policy interest rates. At the Wednesday meeting, rates were held at 5.25-5.50%, where they have sat for the past year, while Jay Powell teed up a .25% cut for the next meeting in mid-September. Asked about the possibility of a .50% cut, Powell said that wasn’t “something we’re thinking about right now.” That clearly changed only two days later, with the Street now widely expecting not only a .50% cut in September but multiple cuts over the next several months.
In our July quarterly comments, we detailed portfolio changes based on our view that the economy would head for a downturn, including reducing small capitalization exposure given its particularly high economic sensitivity. (Small company defaults have indeed ticked up.) We also moderately increased bond duration based on potentially lower interest rates, including at the Fed policy level. We feel this continues to be appropriate. We do maintain some wariness about a reaction to a job report that was, yes, under expectations, but not to a great degree and in fact within a roughly 100,000 margin of error that is always subject to future revisions.
We will be back as events dictate and/or our thinking changes.