In the first 15 days of August, the New York Stock Exchange experienced both the best and the worst of times.
The volatility on Wall Street began on August 1, when the Institute for Supply Management Manufacturing Purchasing Managers Index (PMI) indicated a contraction in the sector’s economy. New orders declined, prices rose slightly, and employment numbers plummeted.
As a result, the Dow Jones Industrial Average dropped about 600 points, while the tech-heavy Nasdaq Composite Index and the S&P 500 Index both suffered losses of approximately 500 and 100 points, respectively.
The selloff in U.S. stocks was further intensified by the July jobs report. The report revealed that the country added only 114,000 jobs, below expectations, and the unemployment rate increased to 4.3 percent, the highest since October 2021.
This triggered what is known as the Sahm rule, named after former Federal Reserve economist Claudia Sahm. The Sahm rule indicates a possible economic downturn when the three-month average unemployment rate is 0.5 percent or more above its 12-month low.
Consequently, the blue-chip Dow Jones index fell by around 300 points, while the Nasdaq and S&P 500 remained relatively stable.
Subsequently, on August 5, the Dow Jones and the S&P 500 experienced their largest single-session losses since September 2022, with declines of 2.6 percent and 3 percent, respectively. The Nasdaq plummeted by 3.4 percent.
This sharp decline was partly attributed to the unwinding of the yen carry trade strategy. This strategy involves borrowing in low-interest-rate currencies, such as the Japanese yen, and investing in high-yielding or high-risk assets.
To counter inflation, the Bank of Japan (BOJ) raised interest rates for the second time since 2007 on July 30. This action strengthened the Japanese yen against the U.S. dollar but triggered a global market crash as investors sold their profitable carry trades and covered their losses in other areas.
While the unwinding of the yen carry trade had some underlying fundamental reasons, the broader market volatility seemed like a perfect storm of various factors.
Nancy Tengler, CEO and chief investment officer of Laffer Tengler Investments, commented that the correction in the market was expected, given the multiple record milestones reached by the benchmark indexes this year. Tengler believes this correction was an overreaction.
The question now is whether the financial markets will experience further losses this year or even slide into a full-fledged bear market heading into 2025.
However, some market watchers believe that the worst may be over for the yen carry trade unwind. U.S. stocks recently enjoyed their best weekly performance since November, with the Dow up nearly 3 percent, the Nasdaq Composite up more than 5 percent, and the S&P 500 advancing by about 4 percent.
Traders’ recession fears have faded in light of two consecutive weeks of dropping initial jobless claims, higher-than-expected retail sales in July, and a decrease in the annual inflation rate.
The University of Michigan’s August Consumer Sentiment Index also showed a slight increase, surpassing economists’ expectations.
Various forecasts suggest that the U.S. economy is unlikely to slip into a recession this year.
Data compiled by Torsten Slok, chief economist at Apollo, indicated that concerns within S&P 500 firms have dissipated, as there has been less talk of a recession during earnings calls.
However, there are still murmurs of recession signals flashing, as some economists suggest that the U.S. economy may already be in a recession.
While there were expectations of a half-point rate reduction during the market panic, the consensus now is a 25 basis-point cut by the central bank.
The Federal Open Market Committee will hold its next two-day policy meeting on September 17 and 18, and the minutes from the July policy meeting will be released on August 21. These releases will provide insights into how Fed officials are monitoring the effects of the restrictive policy on the U.S. economy.
The U.S. central bank will also host its annual Jackson Hole, Wyoming, symposium from August 21 to August 25, where Fed Chair Jerome Powell will deliver the keynote address.
Additionally, the upcoming Nvidia earnings report later this month is expected to be a significant factor for Wall Street. Nvidia is a $3 trillion company and a central player in the field of artificial intelligence. Positive earnings could have a significant impact on the market.
Financial markets will also receive several important data reports, including another second-quarter GDP report, the Feds preferred inflation data, and weekly employment numbers.
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