Recently, market volatility has been in the headlines. With news of Japanese stocks dropping 12% in two days and whispers of economic slowing, we wanted to share a brief explanation of what's happening and, more importantly, how it affects you.
To make matters more complicated, we're being tossed around by one of the most contentious election years in my recent memory. The next 90 days are likely going to be a showcase in extreme headlines. Just remember their goal is to generate clicks, not inform your personal financial decisions...
With that being said, here are the top two factors we're watching behind this recent volatility:
- Japanese Interest Rate Changes
- Corporate Earnings Trends
Japanese Stock Market Triggers Volatility
The primary event that triggered recent market volatility starts with what's called the Japan carry trade. I'll summarize it like this:
- Japan's interest rate has been flat or negative (<0%) for years.
- Investors could borrow free money and invest it in other currencies or markets.
- Even returns of 2% generated useful gains.
This set of conditions has remained steady for the better part of a generation–until recently. Japan raised its interest rate to 0.25%, triggering fears of additional raises coming.
Those fears drove a rapid unraveling of investments made on the premise of low interest rates. In 2 days, Japan's stock market dropped 12% as investors took protective actions. The rest of the world felt what you might call the aftershocks of Japan's more severe tremors.
Concern Over Corporate Earnings
An additional variable we are watching is a slight slowdown in corporate earnings. The markets have been driving intense gains in areas like tech, pricing these companies to near perfection. (Not perfect in terms of value, but perfect in terms of expected performance.) It's created disproportionate earnings in a very small corner of the market.
The way I would explain without jargon: big tech has been essentially doing 85 in a 65. They pass a speed trap and drop to 75. It's still speeding, but we feel the comparative slowdown. If markets are expecting them to grow from 25-35% a year, 15-20% feels like a slowdown.
We are still waiting to see if the slowing trend continues, but for now, we're not in any fearful territory.
We Welcome Your Questions
Here at Vizionary Wealth Management, we are always here with perspective for the decisions ahead and help you Envizion More. If you have questions about how the markets are affecting your portfolio, outlook, or perspective, please don't hesitate to reach out and give us a call.