August 05, 2024

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What causes markets to go up or down?  

For long-term investors, the value of stocks reflects the “present value of future cash flows.” Traders, on the other hand, are more often concerned with the short-term direction of stocks. If a stock is going down, sell. If a stock is going up, buy.
We encourage our clients to think like an investor, not like a trader.

What is currently happening in the stock market?

Markets hit an all-time high just a few short weeks ago on July 16th. GDP growth, the best measure of economic progress, continues to be positive. Unemployment is on the rise, but at around 4% is still hovering near all-time lows. Are economic conditions really positioned for a sustained stock
market crash? In our view, the answer is ‘no.’ Stay calm and don’t panic. The US economy doesn’t turn on a dime, and we do not view this sell-off as creating excessive financial stress. Remember, it is typical for stocks to have at least a 10% pullback during most calendar years!

So, then, what does Cutler believe is happening? Two things. The first is something we have highlighted for quite some time. Tech valuations are expensive. Even before this recent sell-off gained steam, we began seeing a rotation out of Growth and into Value stocks. Value has underperformed for years, taking a backseat to the Magnificent 7 stocks. It is unsurprising to see Value, and other asset classes like Small-cap stocks, having some relative strength. With Tech stocks now a sizable percentage of the S&P 500, this rotation contributed to the market averages also pulling back.
The second impact is more technical and involves what is called the “carry trade” in Japan. For decades Japan has dealt with deflation, and their interest rates have been near the world’s lowest for much of this time. This has allowed investors to borrow money in Yen and use that loan to purchase equities in the US. That has put a lot of downward pressure on Japan’s currency, and the Bank of Japan finally stepped in to support their currency, raising rates 25 basis points. This was only their second rate raise since 2007! How important is this “carry trade?” Estimates in the trillions of dollars have been linked to this market exposure, and we are seeing that “unwinding” these trades can create a lot of market volatility.

How should Cutler clients respond?

In times of market stress, opportunities arise. Instead of being reactive to a sell-off, we encourage clients to be proactive. We will reposition portfolios as we see opportunities present themselves, but what should you, as a client, be doing? Do you have cash on the sidelines or in a money market account? Perhaps this is a good chance to get those funds invested into an investment portfolio. Have you been in a strategy that is a little more conservative than you’d like? Let’s talk about shifting into a more aggressive portfolio. You may also think about falling interest rates, and how you could take advantage. Mortgage rates are dropping; talk to us about whether you should consider refinancing.