The Global Stock Market Index is down just over 3.5% this week. Why the sudden shift in momentum? Well, this week investors began to reassess their assumptions on the path of Fed rate cuts.
Just three days ago, the Fed Funds Futures were pricing in a 25bps cut this month and potentially four cuts by the end of the year. However, stock market investors were much more aggressive with their assumptions, expecting 50bps this month and a more rapid decline in rates over the next year.
We received several statements this week from Federal Reserve officials which confused the markets and led many stock investors to walk back their assumptions on the pace of cuts.
This morning the employment report was released and added a bit more fuel to the fire. Employment gains missed expectations in August and the July and June numbers were revised lower. This led a few people to increase their recession odds sparking a shift in earnings expectations.
This combined shift in earnings outlook and interest rates has led to the selling we are seeing today.
So is this week’s selling a sign of further distress in stocks? Well its probably too soon to jump to that conclusion just yet.
Along with the weaker than expected jobs report, we also got data that hours worked and wages came in a bit better than forecasted. For the first time in several years, wage growth was higher than inflation meaning that real wages were rising.
September is historically the worst month for stocks but on average the markets rally into year end. We’ll see how this year plays out, but as you know we are already about 10% underweight stocks relative to benchmark with the bulk of those assets allocated to attractive private credit opportunities.
We aren’t surprised by the elevated levels of volatility in markets. Think of everything going on right now:
- US Election
- Federal Reserve Monetary Policy Shift
- Middle East and Ukrainian Wars
- Japanese Yen Carry Trade Unwind
It is a lot for the markets to handle and given all of the uncertainty, volatility has spiked.
We will continue to evaluate our positioning and make adjustments as we see opportunities.
