Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Chief Investment Strategist
Financial markets were already shaky on Friday with the weak US jobs report triggering discussions about that the Fed had made a mistake by keeping interest rates too high for too long. Today the worries that surfaced on Friday exploded into significant risk reduction and a historic move in Japanese equities down 12%. This is the biggest single day decline in Japanese equities going back as far as 1959. Equity futures are also pointing to a significant down day in US technology stocks indicated down 3.9% in pre-market trading. What are the factors behind this sudden sharp selloff?
When the VIX Index (the fear index) goes to 38 from 18 in just two trading days it kickstarts reduction of risk, and when everyone wants out of the door at the same time things move fast. That is what we have seen today in Japanese equities. Markets will in the short term be very volatile and more technically driven than based on fundamentals. This is exactly why long-term investors should avoid reacting too much today. As Warren Buffett has famously said “The stock market is a device which transfers money from the impatient to the patient”. The worst mistake any investor can make today is drastically selling positions.
The correction in US equities is set to reach around 7% today from the peak in July based on equity futures in pre-market. This is what is called a mild drawdown and something that is seen rather often inside a longer bull market and a positive economic cycle. If the next round of macro indicators worsen then the decline could extend to around 15% which would take the S&P 500 Index down to around the 4,800 level. The 5,000 level in S&P 500 was where the market bottomed back in April and where the 200-day moving average is currently sitting. A 15% correction is more rare but typically an important inflection point because either the recession is not coming and equities rebound, or the recession is coming and the correction extend further.
Looking into the future the two key fundamental drivers will be whether the AI boom can continue and whether the economy slips into a recession.
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