Fears About 3 Key Market Issues Are Fading
Volatility will remain elevated as market participants contemplate recent news events.
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Three issues have helped to trigger recent market volatility. Investors are grappling with all three and are no longer feeling quite as fearful.
The first issue is concern that the economy is slowing. Almost overnight, the major economic worry shifted from inflation to recession. A poor jobs report last Friday triggered a big move, and suddenly, there were concerns that Fed policy was lagging and they should have already cut interest rates.
The poor jobs news was due in part to a larger number of people looking for jobs and wasn’t quite as bad as it appeared. While the economy is showing signs of slowing, it isn’t in freefall. Most importantly, the Fed is prepared to move quickly to cut rates, which will reassure the market.
The second issue that hit the market was an unexpected interest-rate increase in Japan, which caused the yen carry trade to blow up. Japan suffered its worst drop since the market crash in 1987 as investors scrambled to reverse big bets on a weak yen and low interest rates.
Overnight, the Bank of Japan stated that it had no further plans to raise interest rates, which caused the yen to drop and helped the Nikkei rebound. That is adding stability to the market action on Wednesday morning.
The third issue that hit the market was a massive sale of Apple AAPL by Warren Buffett. The market was already grappling with the valuation of big-cap AI technology stocks. Both Microsoft MSFT and Alphabet GOOGL indicated that they would need to make substantial capital investments before they would realize the financial benefits of AI. Buffett’s move triggered further rotation out of the group and raised further concerns about the valuation of stocks such as Apple, which has a trailing P/E of 32 and growth of single digits.
The reassessment of the Magnificent Seven and other big-cap names is an ongoing issue, but dip buyers are showing interest, and it looks like support is being built. While it is likely that there will be more rotation action out of the group in the months ahead, it will be a very bumpy process. The Mag 7 has clearly lost momentum, and the group is not going to have the same sort of leadership that it had earlier this year.
Those three issues have been driving the market action, and now market participants are trying to decide where things are heading next. One bigger problem in the near term is seasonality. The period from August through October is historically the weakest period of the year, and that may come into play as earnings season concludes. We will enter peak Wall Street vacation season at the end of the month.
I’m primarily focusing on a number of small-cap earnings reports and looking for signs that the rotation into the Russell 2000 IWM may regain traction. The market shakeup has created some mispricing in stocks, and the increased volatility is supportive of shorter-term trades.
We have more bounce on Wednesday morning as recent fears are fading.
At the time of publication, Rev Shark had no positions in any securities mentioned.
