It was the best of times and it was the worst of times on the New York Stock Exchange in the first 15 days of August.
Wall Street volatility started on Aug. 1, when the Institute for Supply Management Manufacturing Purchasing Managers’ Index (PMI)—a measurement of the prevailing economic direction of the sector—deepened into contraction territory in July. New orders fell, prices edged up, and employment tumbled.
The Dow Jones Industrial Average shed about 600 points after the data were published. The tech-heavy Nasdaq Composite Index lost about 500 points, while the S&P 500 Index erased nearly 100 points.
The July jobs report exacerbated the selloff that unfolded in U.S. stocks.
In July, the country added a smaller-than-expected 114,000 jobs and the unemployment rate ticked up to 4.3 percent, the highest since October 2021.
While the monthly employment data highlighted a labor market still creating jobs, markets tanked because it activated the Sahm rule.
The Sahm rule, named after former Federal Reserve economist Claudia Sahm, has turned into a widely watched recession indicator. It is triggered when the three-month average unemployment rate is 0.5 percent or more above its 12-month low, suggesting that the economy might be in the early stages of a downturn.
After the labor figures, the blue-chip Dow Jones fell by about 300 points. The Nasdaq and S&P 500 were little changed.
On Aug. 5, the Dow Jones and the S&P 500 registered their largest single-session losses since September 2022, falling by 2.6 percent and 3 percent, respectively. The Nasdaq plummeted by 3.4 percent.
The sharp decline was partly driven by the unwinding of the yen carry trade.
This strategy is borrowing in low-interest-rate currencies, such as the Japanese yen, and reinvesting the proceeds into high-yielding or high-risk investment assets.
The Bank of Japan (BOJ) raised interest rates for the second time since 2007 on July 30 to “around 0.25 percent” and signaled more hikes to come. While the monetary policy action strengthened the Japanese yen from its four-decade low against the U.S. dollar, the move led to a global market crash.
Although the Japanese central bank’s hikes were modest—0.15 percent—the decision forced investors to sell profitable carry trades and cover their losses in other areas.
“There were some genuine fundamental reasons for some degree of unwind in the yen carry trade specifically that we talked about—some genuine fundamental shifts in the macroeconomic picture in Japan and the U.S. But some of the broader volatility does feel to me like it’s a few different things that came together in a perfect storm.”
The leading benchmark indexes have enjoyed multiple record milestones this year, so it was inevitable that markets would experience a correction, according to Nancy Tengler, CEO and chief investment officer of Laffer Tengler Investments.
“The market experiences a correction (down -5.0 percent to -10.0 percent) on average every 12 months. We were overdue,” Tengler said in a note, which was also emailed to The Epoch Times, saying that the selloff was “most certainly an overreaction.”
The question is whether the financial markets will suffer more immense losses this year or even slip into a full-fledged bear market heading into 2025.
As for the yen carry trade unwind being over, one market watcher thinks the worst is over.
The Next 15 Days
The financial markets have recovered much of their losses.U.S. stocks enjoyed their best weekly performance since November. The Dow was up by nearly 3 percent this week, the Nasdaq Composite climbed by more than 5 percent, and the S&P 500 advanced by about 4 percent.
Since the three-day meltdown earlier this month, traders’ recession fears have faded.
Initial jobless claims dropped for two consecutive weeks. Retail sales advanced at a higher-than-expected pace of 1 percent in July, up from the downwardly revised negative 0.2 percent in June. The annual inflation rate dipped below 3 percent for the first time since March 2021.
The University of Michigan’s August Consumer Sentiment Index ticked higher and came in above economists’ expectations.
Indeed, talks about a recession—defined as back-to-back quarters of negative gross domestic product (GDP) growth—have been mixed as of late.
Various forecasts suggest that the U.S. economy is unlikely to slip into a recession this year.
Among S&P 500 firms, concerns might have dissipated, according to data compiled by Torsten Slok, chief economist at Apollo.
“The media is full of anecdotes from earnings calls about the economy supposedly slowing down,” Slok said in a note, which was also emailed to The Epoch Times. “But the reality is that firms on earnings calls talk less and less about recession.
“In fact, we have never had a recession at the current low level of recession talk.”
“Important elements of our growth forecast are being challenged. U.S. news hints at a sharper-than-expected weakening in labor demand and early signs of labor shedding. The latest business surveys also suggest a loss of momentum in global manufacturing and in the euro area—weak links in the expansion that we have expected to lift this year,” said Bruce Kasman, chief global economist at JPMorgan. “On the other hand, these forces are being tempered by solid continued gains in overall activity, led by the service sector.”
On the other hand, there have been murmurs of recession signals flashing.
“When the minimum indicator is between 0.3pp [percentage point] and 0.8pp, the recession might have started. And when the minimum indicator is above 0.8pp, the recession has started for sure,” the economists wrote in the paper. “With July 2024 data, our indicator is at 0.5pp, so the probability that the U.S. economy is now in recession is 40 percent. In fact, the recession may have started as early as March 2024.”
Other Market Catalysts
The Federal Reserve may also significantly affect the stock market’s near-term performance.While traders widely expected a half-point rate reduction during the market panic, the consensus is now that the central bank will initiate a 25 basis-point cut.
The rate-setting Federal Open Market Committee will hold its next two-day policy meeting on Sept. 17 and 18.
Minutes from the July policy meeting will be released on Aug. 21. The meeting summary might offer important insights into how Fed officials are observing the effects of restrictive policy on the U.S. economy.
The U.S. central bank will host its annual Jackson Hole, Wyoming, symposium from Aug. 21 to Aug. 25, with Fed Chair Jerome Powell set to deliver the keynote address.
Another factor for Wall Street will be the next Nvidia earnings report later this month, according to Ken Mahoney, CEO of Mahoney Asset Management.
“Aug. 28 is an important date that both traders and investors have circled. This is the date for the earnings report for Nvidia,” he told The Epoch Times. “This is one of the biggest market movers. This is a $3 trillion company. And since they are the epicenter of artificial intelligence, investors are hoping that the earnings report is stellar.”
On the data front, financial markets will receive another second-quarter GDP report, the Fed’s preferred inflation data, and a set of weekly employment numbers.
