Economic Data and Market Highlights
Weakness in the equity markets continued this past week. On Monday, Japanese and global markets fell due to the unwinding of a relatively popular yen carry trade. The trade takes advantage of borrowing yen at a low cost and investing it in other currencies or assets that provide higher yields. Carry trades can provide strong returns when markets are not volatile but are extremely sensitive to fluctuations in the price of the currency they are borrowing. As discussions around US rate cuts have started to seriously permeate the market over the last month, the price of the Yen has risen 13%, narrowing the yield gap that makes the trade possible. To cover losses, leveraged investors were forced to liquidate other holdings to cover the loss. US markets were hit hard on Monday as well with the S&P 500 falling 3% the Nasdaq falling 3.43%, and the Dow falling 2.6%. Markets rebounded throughout the rest of the week finishing mostly flat from the previous week’s close. The S&P 500 fell two basis points, the Dow fell 56 basis points, and the NASDAQ fell two basis points.
The tech heavy Nasdaq has declined roughly 9% over a 1-month time period. UBS analysts made a comparison going back to the third quarter of 2011 where the index declined 8% and since then there has only been 3 other quarters where the index saw worse returns. During that quarter the market was in the thick of the US debt ceiling crisis which was averted on July 31st. The earnings season during that time period was mixed which is similar to what we are seeing now. Afterwards, there was a decade long period of outperformance which ended in the 4th quarter of 2021. The Nasdaq’s compound annual growth rate on a return basis has been 18.5% over the last 15 years per FactSet data. Market experiences volatility and we are seeing the VIX rose to levels this week not seen in recent years. the VIX hit 65.7 Monday and the last time we saw the index at this level was during the initial emergence of COVID-19 in early 2020. The VIX closed Tuesday at 27.71 which is 50% off from Monday’s high. Based off Monday’s close the VIX fell 41% which marked the largest single day move.
Following the jobless claims report Thursday, we saw indices rebound as it brought some positivity that the labor market is still in good shape. The decline in new claims looks to soothe wall street’s nerves following a July jobs report on August 5th that signaled a slowdown in hiring only creating 114,000 new jobs in July. New claims fell by 17,000 in the week ending August 3rd from 250,000 in the prior week and marks a one month low. Forecasts were targeting new claims to come in at 240,000 so the reading was lower than expectations. The new claims seen earlier this month appeared to be mostly from the hurricane in Texas making it hard for people to work. Auto plant shutdowns in states like Michigan also made the number tick north in the new unemployment fillings. New jobless claims fell in 25 of the 54 states and territories that report to the federal government. The biggest declines were seen in Texas and Michigan. Automakers traditionally shut down plants in parts of July so they can build new models and retool plants. To summarize, businesses are not hiring as many people but are also not firing as much either signaling a cooling labor market.
Despite the US stock market struggling throughout the summer, and big selloffs being seen on some stocks such as Tesla and Amazon that missed earnings, companies that beat earnings estimates have seen the most positive responses in the day following their earnings announcement. Firms that beat Q2 profit estimates outperformed their benchmark by 1.7%, the widest margin seen since 2019. Firms that missed profit estimates saw declines of 1.1% in the day following, one of the smallest declines in the same period. Q2 saw the strongest profit growth for S&P 500 companies in over three years at 13%. With 78% of S&P 500 companies reporting earnings above analyst expectations compared to the long-term average of 66%, with blended revenue growth estimates sitting at 5.3. If energy is excluded, growth for the index is estimated at 5.1%.
The Past Week’s notable US data points
The Upcoming Week’s notable US data points
Data Source: Blackrock, Bloomberg, Charles Schwab, CNBC, Goldman Sachs, J.P. Morgan, Morningstar, MarketWatch, Standard & Poor’s, and the Wall Street Journal.
Authors:
Jon Chesshire, Managing Director, Head of Research
Michael McNamara, Analyst
Sam Morris, Analyst