Monthly Report August 2024

The market cheer to the September tune was short-lived. During the press conference on July 31, Federal Reserve Chair Jay Powell made it anything but clear that the Fed would begin cutting interest rates in September. Markets initially reacted positively to the prospect of lower Fed funds rates. However, in the following trading days, the tide turned for the worse. Labor market and economic data, which came in below expectations, were interpreted as a sign that the Fed was already behind the curve and that the signaled rate cuts in September would be too little, too late.

In equity markets, the S&P 500 in the US saw a monthly decline of 4%, and the Nasdaq Composite dropped by 9%. By contrast, the Russell 2000 (Small Caps) gained 4%. Year-to-date, the S&P 500 and the Nasdaq Composite were still up by 12%, while the Russell 2000 rose by 4%. The S&P 500 reached a new all-time high of 5,667 on July 16, but by August 2, it had slipped to 5,346, nearly 6% lower.
In Europe, the Stoxx 600 lost 3% over the month, the Swiss Leader Index (SLI) dropped by just under 2%, and the FTSE 100 in the United Kingdom hovered around the 0% mark. Year-to-date, the Stoxx 600 posted a 4% gain, the SLI rose by 8%, and the FTSE 100 advanced by 6%.
In Asia, Japan’s interest rate hike led to a setback in the Nikkei 225, which fell by over 12% for the month, while the Shanghai Composite slipped by nearly 2%. Year-to-date, the Nikkei 225 remained up by 7%, whereas the Shanghai Composite had lost a bit more than 2%.

A closer look under the hood of equity markets revealed a more nuanced picture. In the US, the real estate sector rose by 9% and utilities gained 8% over the month, while the technology sector took a hit, losing over 12%.
In Europe, defensive sectors were also in demand last month: telecommunications rose by 3%, real estate by 2%, and utilities and healthcare each by 1%. In contrast, technology dropped by 15%, basic resources by 12%, automobiles by 11%, and banks by 10%.
A similar pattern emerged with style factors: both in the US and Europe, the minimum volatility factor led the month, while the momentum factor performed the worst. This suggests that equity markets have been pricing in a so-called disinflation scenario, where growth and inflation rates decline simultaneously.

The Bank of Japan’s surprising interest rate hike on July 31 led to a dramatic surge in the Japanese yen. The USD/JPY exchange rate fell from 153 to 146 in just the last days of July and the first days of August. For some market observers, these sharp yen movements have been a contributing factor to the turbulence in global financial markets. The Swiss franc, also considered a “safe haven”, ended the last trading week particularly strong. As of the close of trading on August 2, the USD/CHF was at 0.858 and the EUR/CHF at 0.936.
The interest rate cut by the Bank of England on August 1 was somewhat overshadowed by the broader turbulence in the news flow.

The bond markets also experienced significant fluctuations. The yield on 10-year US Treasury Bonds fell below 3.80%, down from 4.45% at the beginning of July. The yield on 2-year US Treasuries plummeted in recent trading days to below 3.90%, from 4.75% at the start of July. The yield on 2-year bonds is heavily influenced by expectations of central bank policy, while long-term yields typically reflect anticipated economic and inflation data.
Germany and Switzerland also saw a decline in long-term yields. The yield on 10-year Bunds fell below 2.2%, while the yield on 10-year Swiss government bonds dropped to under 0.4%.

The prospect of falling interest rates due to lower inflation and a cooling economy provided the ideal backdrop for gold prices. As of the close of trading on August 2, the price approached $2,500 per ounce, marking a new all-time high.

The Volatility Index (VIX), also known as Wall Street’s fear gauge, hit a daily high of nearly 30 on August 2 and ended the trading day at 23. VIX values between 20 and 30 are generally considered to indicate volatile, challenging markets. Levels above 30 suggest heightened discomfort. Conversely, VIX values below 19 are seen as indicative of investable, stable equity markets where stocks typically trend upward with relative ease.

Historically, the US economy has often slid into recession following the first rate cut. Additionally, the normalization of the yield curve through a “bull steepener” – where short-term rates fall more sharply than long-term rates – has traditionally been far from bullish for the economy and has often been a precursor to a recession.

Many market participants are debating whether to use market pullbacks as opportunities to buy (“buy the dips”) or to sell stocks after price increases (“sell the rips”). For the following reasons, we currently do not consider it prudent to make large bets:

1. Year-to-Date Gains: Many assets have already seen significant gains this year, and fund managers are sitting on substantial profits. For many, risking these gains is not worthwhile. They consider it safer to park the money in short-term government bonds to secure moderate returns and reassess the situation in early 2025.
2. Liquidity Issues: Market liquidity is increasingly becoming a problem, exacerbated by algorithmic trading, leverage, and crowded positions. If market sentiment shifts, it could lead to exaggerated price movements.
3. Seasonal Trends: August and September have historically been challenging months for the stock market.
4. Expectations for the Federal Reserve: While the market now anticipates with 80% probability that the Fed will cut rates by 0.50% in September, this may be overly optimistic. Statements from Fed officials suggest they are more reluctant to lower rates as sharply as the market expects.

A famous investor once said, “It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.” The future is unknown to anyone; no one knows what is coming. One of the greatest risks is having too much conviction about future events, which can lead to an imbalanced portfolio. In this context, we believe that genuine, structural diversification is prudent. To complement equity holdings, we primarily favor investments in long-term government bonds and gold. Additionally, for those willing to take on a bit more risk, top-tier gold mining stocks can be considered. These have underperformed relative to the rise in gold prices so far this year.