Why the Market Has Sold Off and What Should You Do
27:44 Share

What kind of money for the rest of us? This is a personal financial on money, how IT works, how to invest IT and how to live without worrying about IT. I am your host, David stein.

Today is episode four eighty nine. It's titled why did market sell off? What should you do yesterday, monday, August? Faith was one of those violent drops in the stock market that can be incredibly unsettling.

On monday, the japanese stock market fell over twelve percent, its worst one day decline since one thousand nine hundred eighty seven in october thousand nine hundred eighty seven, U. S. Stock market and many markets around the world fell over twenty percent this past monday.

Most other stock markets besides japan fell between three to four percent. The vines volatility fear index, this is essentially the volatility Priced into S M, P. Five hundred U S.

Stock options IT jump ed to fifty five during the trading day on monday and ended at thirty eight back the end. July was around sixteen. We seen interest rates fall in the us.

The ten treasury bond has fAllen about a third of a percent in the past couple days, taking IT down to three point eight percent. This violent drop in the stock market reminded me of really last time this happened, and we did an episode on IT. IT was june twenty twenty.

I was out with the pro. We were up in the mountains and I happened to get some internet, and I saw that the dow Jones industrial average had planted six point nine percent. IT can vote, some fear, some uncertainty.

We ask what is going on. We think about our portfolio. Maybe it's too risky.

Perhaps we are approaching retirement and then we worry, well, what if things keep getting worse and we won't be able to retire should we start selling? Apparently, lot of people wanted to sell on monday because that looks like the Charles swap and the apps ran into some technical issues. People couldn't log on to their accounts.

Now perhaps there was just too many people. Others look at drops like this and think, well, maybe it's a buying opportunity. The market turmoil yesterday is happens during the one week where i'm preparing the monthly investment conditions and strategy report we do for money for the rest of plus.

This is also the week we hold our monthly weber for asia camp subscribers. This is our stock and bond market data and research service. So in this subset, I thought I would be helpful to unpack what i'm seeing as I prepare the investment conditions report for a membership community and get ready for this weapon.

On what am I seeing? My preferred time period is to analyze markets on a monthly basis once a month that's frequent enough to stand top of any shifting friends, but not so frequent as to get overwhelmed. Too much data, too much information.

And that's why we update the financial data on asset cap monthly instead of daily. And it's why I prepare a monthly investment condition report every month like i've done for the past decade prior to that. As an asset manager and investment advisor looking at markets formally on a monthly basis.

So in looking at what happened, the first thing I tried to produce is figure out what what motivated the change in and what's changed. And there's really three things that I saw. First, there was a weaker than expected U.

S. Jobs report that has increased fears of a recession. The second thing that happened was the bank of japan raised its policy rate for the second time this year after having a zero percent to negative policy rate since twenty sixteen.

We'll look in more detail why that even matters. And the third thing is they were worries regarding the profitable of big tech companies given their massive investment. N.

A. I. Let's focus first on the job report and recession fears in the U.

S. Employment report. There's two surveys to do. Once is the household survey. The other is the establishment survey. The household survey is what is used to calculate the unemployment ate, and the unemployment rate increased to four point three percent. In july a year ago, I was three and a half percent.

There were a number reports, and I had never heard of this role, which is one of the things with economic, something happens. And then IT triggered some rule that suggest a recession risk. And then people get worried.

Where the rule this time was is called the sam rule S. A H. M. And apparently, IT has never failed to predict a recession.

And that rule is triggered when the three months moving average of the U. S. And imployment rate.

So four point three percent this month. IT was four point one percent the previous month and four percent the month before that. So the average is around four point one, three percent.

So they calculate the average of the past three months. And then if that's a half percentage points above what the unemployment rate was a year ago, three and a half percent, then that trigger a rule. So with three months average of four point one, and that's more than a half percent then the unemployment rate a year ago.

And supposedly, that will predict the recession. Well, it's not that simple. We have to dig in to the report to understand what's going on in. One of the things that's happening is even though the unemployment rate is increasing, the actual number of people employed is also going up so that the labor force is bigger than IT was.

Its growing in the number of people employed is more and the number of people unemployed, it's more in that percentage has picked up a little bit, but we're still at historical low unemployment. So i'm not overly alarmed by that. We can't just look at one month or one rule, the other report then to see the establishment data report.

And that was disappointing IT, so that only one hundred and fourteen thousand non farm jobs were created last month. That was below the consensus. But one of the ways we typically look at this is what was the three months average and the three months moving average actually increase to one hundred and seventy thousand jobs created on the average over the past three months.

So when we consider the unemployment report is one data point, IT did trigger the sum rule, but we're also at very, very low unemployment rate. And so while IT wasn't a great report, I don't consider IT alarming. And with that's why we look at the three months average and and that still steady job creation.

The number of jobs in the us. Is growing, but it's something to keep an ion. Before we continue, let me pause and share some words.

One of this weak sponsors net sweet quick math, the less your business spends on Operations, on multiple systems, on delivering your product or service, the more margin you have and the more money you keep. But with higher expenses on materials, employees, distribution and borrowing, everything costs more. So that reduced costs and headaches.

Smart businesses are graduating to net sweet by oracle next week is a number one cloud financial system, bringing accounting financial management in mitra hr into one platform and one source of truth with nets. We you reduce IT cosh because nesi ET lives in the cloud with no hardware required access from anywhere. You cut the cost of maintaining multiple systems because you've got one unified business management suite.

You improve efficiency by bringing all your major business processes into one platform, slashing manual task and nairs. Over thirty seven thousand companies have already made the move. So do the math.

See how your profit with next sweet, with everything seem in to be more expensive these days. It's wise to find proven ways to cut cost and boost performance at the same time. That's what next week can help with and by populated and next week has extended its one of a kind flexible financing program for a few more weeks.

Had a net sweet dot comes last, David. That's net sweet dot comes last, David. Net sweet dot. Come slash, David. The other thing that I looked at and we've looked at on money for the rest of us are leading economic indicators.

These are designed to to provide an early signal, a turning point in the business cycle there to see if recession risk is increasing. And there are two types of leading economic indicators. There is surveys, and the primarily want one that but I use or we use is purchasing manager indices PMI.

These are business service done around the world. The other are leading economic indicators that are based on some rubrics of economic and financial data point. And they might measure the same ten points and then they do an index to see is the current reading below the long term of averaging is a signify recession risk for PMI.

There's the manufacturing businesses and their services businesses, and it's true manufacturing PMI data worsening the little bit in the most recent release. It's down to forty nine point six. Typically, fifty is neutral, above fifty would be expansion and below fifty would be contraction territory globally, the manufacturing at forty nine point six.

So that can be disconcerting. But that just one element of the economy, the services side globally increased to fifty three point three. So it's in expansion territory and it's a point two points from last month.

So the services are actually improved even though manufacturing has gotten worse. That was global U S. services. PMI is fifty five. Buy one provider market S M P and the others at fifty one point four that also improve.

The I S M is the one that is a fifteen one point four until when we step back and think about, well, where are we the composite, globally composite, that takes the manufacturing and the services. It's at fifty two and a half still an expansion territory. So that leading economic indicator suggests now the recession risk remains low, both globally and in the us.

Another reading economic indicator is the oecd. This is one that takes certain metrics and measures them each month. It's at one hundred point three.

Typically, a recession would hit if IT would below one hundred. Fact, during the twenty twenty two IT, IT went below one hundred, and now it's back above, suggesting improvement in the economy. Another leading economic indicator for the us.

Is the U. S. Leading economic indicator by the conference board. IT has been flashing a recession signal for two years now.

The first time was back in october twenty twenty two, and it's when we downgraded economic trends to red barish. We monitor IT and we didn't get overly barish and the recession never hit. And now the leading economic indexes is is improving.

It's still negative. That is below its six months average and most of the components are negative. But if we look at what conference board is saying there, they're seeing not a recession, but just a slowdown in the economy.

They have another index of coincident index, which measures where things are now we had actually improved last month. If we look at the actual economic growth as measured by GDP, the most recent release show that the U. S.

Economy grew two point eight percent in the second quarter, and the consensus is is expected to grow one and a half, the two and a half percent in the third quarter. All in all, one data point was weak, the U. S.

Unemployment report, but not tremendously. So IT wasn't awful. There was no job contraction.

Like you often see that the reserve chair j pass says we will be data dependent but not data point dependent. They're just not going to rely on one data point, he said. And this was from his press conference on july thirty first.

You don't see any reason to think that this economy is either overheating or sharply weakening. That's just not the data right now and that would include the unemployment report is one data point. One improvement we are seeing is in in flame core inflation, which excludes food and energy, increase point one percent in june, in point two percent in may, but the annual rate is still three point three percent.

And that's one of the things the federal ve is waiting to see additional movement to cut its policy rate. IT didn't cut IT at its july meeting. Then there was the employment report and there was a lot of criticism of the fed that says why you should have cut the rate, but they're being consistent.

Other countries have begun reducing their policy rate. The european and union, the U. K.

And canada, i've all produce their policy rate. The U. S. Has not yet. But after the employment report, IT became pretty clear that they will in the september meeting.

And power in the federal also made a pretty evident that they were going to in lower the policy rate, which is currently at five point two five to five and a half percent. In fact, we look at the futures market expectations, they're pricing in one hundred percent problem ability of the policy rate cut in september, november and december. In fact, they are pricing in a forty five percent probability that the policy rate will be a percent lower by november than IT is today.

I don't think that's the case, but IT does mean that cash eds are coming down and later in the subsidy will talk about what we can do about that. But we done episode don't what to do about that. And I implemented some of those suggestions are my portfolio. Now I had a question from a member of money for the rest of plus asked, will the federal reserve do an emergency cut, which is basically lower their policy rate between official meetings? I don't think so.

The last three emergency cuts were the last two were during march twenty twenty, during the panna mic, when IT became clear that the global economy was going to shut down due to cove IT and the federal serve cut its policy rate a half a percent on march third and another one percent on march fifteen. Now those are major move. The time before that was back in october two thousand eight, during the great financial crisis.

So as if that gonna cut pilot between meetings due to one below consensus unemployment report. No, they're not. Austin goosby, who is the president of the chicago fed, said, we never want to overreact anyone.

Months numbers, they're not. Now there are some things in favor of the economy, positive short term, more disconcerting a long term. But we've talked about the national debt and large budget deficits in the us.

Typically, when you have a recession, the federal government coordinating with the central bank will provide some type of stimulus that can be physical stimulus and IT could be monetary stimulus by lowering policy rates. The fiscal stimulus leads to, uh, greater budget, but the budget get deficit in us is a tty huge on a percentage basis related to the economy. The congressional budget office predicts that the budget deficit for fiscal year twenty twenty four will be six point seven percent of GDP, the fifty year average three point seven percent.

That's the highest peace time budget deficit, the GDP in U. S. History, not counting the two two thousand eight financial crisis and the covet pandemic. So there's already fiscal stimulus taking place, and that's a combination of spending but also interest payments on the debt, which flows out into economy. So that's good on the short term.

On the longer term, how sustainable is that? And we've talked about what to monitor term premiums, ms, for example, on interest rates before we should start worrying about that. And we covered that a few episodes to go.

But that's positive for the U. S. economy. In the short term, that level a deficit. In addition, if the federation serve lowers its pile as you rate and as if longer term interest rates fall, as IT have been, then that will lead to lower mortgage tes. The housing market has been heavily constrained by monday rates, over six percent.

Many people been unwilling to move or put the house in the market because they've locked in a three percent mortgage. If mortgage rates fall, then more these people will want to sell in a be more housing activity, more turn over. And that can lead to people buying furniture, appliances and settle.

That's good news for the economy. Travel is still booming. We ve got record travel numbers.

And so when we think about recession risk globally and us, it's possible, but the risk is law is evidence by current data and leading economic indicators. Before we continue, let me post some words from this week. sponsors. For almost a year now, i've been using monarch money as my personal finance to do my budgeting and monitor my finances.

Monarch is a Operated all in one personal finance that you get a comprehensive view of all your accounts, investment transactions in more you can create custom budgets like we have done, track progress toward financial goals and collaborate with your partner. Plus monarch automate smart money moves to get you closer to your goals. And now you can get an extended thirty day free trial when you go to monarch money that come slash David.

I primarily use monarch money to track my spending and to go over our budget is simple to use. I can customize IT and IT just gets the job done. So after trying out monarch myself, I understand why it's a Operated personal finance up.

And right now, listeners at this show will get an extended thirty day free trial when you go to monarch money dot coms lah. David, that's M O N A R C H M O N E Y dog comes less, David, for your extended thirty day free trial. Now the other thing that occurred recently is the japanese yen strengthened significantly after the bank of japan increased policy rate.

IT increased IT last week. The new ranges between zero and point two five percent that compares to the U. S, which is at five point two five percent when you have those type of rate disparities, very low interest rates in japan, higher interest rates in the s and those low and japan have been there since twenty sixteen.

That very much encourage is what's known as the Carry trade. It's the ability to bar win one country in japan and then invest in another country like the U. S.

And in, if exchange rates don't work against you and things stay fairly stable, you can earn a profit and hedge funds do that, other investors do that. And that has been an incredibly successful trade using a great deal of leverage up until last week, where the yen strengthen twelve percent in a matter of days. Now the end itself is weakened substantially since twenty twenty one relative to the dollar, forty five percent.

But that unwinding of the Carry trade leads to a big strengthening of the yen and definitely float into the japanese stock market. The japanese stock market didn't very well this year. Through july, IT was the best performing stock market in the world on a local currency basis, up twenty percent in the us.

dollar. It's up twelve percent for the dollar, strengthened about seven percent year to date night through july. So even in my last month, for example, this is where currencies can be really confusing in local currency, the japanese stock market fell one percent in july, but once we convert that to us dollars because the end strengthen, the japanese stock was up five point eight percent just in the month.

So that currency strengthening started at the end of july, about a seven percent strengthening of the yen and july, just really a matter of days. But that injects volatility into currency, into yields, IT overflows into the stock market. We don't quite know what all unintended consequences of that is, but that's part of the reason the market sold off big swings and currencies because the interest of differences between japan and the U.

S. Has narrowed, and it's as relative rate differences that primarily drive currency exchange rates. So that's the second thing that happened.

And IT doesn't over concern me because if anything, a strengthening japanese yen will help the japanese economy and the japanese consumer because they import so much food and energy into the country that a strengthening yen will make those imports more affordable, and that will flow into the overall economy. Then the third thing that really change is there was some concern is regarding corporate profits for the big tech companies. And there's been a rotation out of large cap growth into small cap value in the past month.

U. S. Growth in U. S, as represented by the vanguard growth.

Y ta vu. G, has fAllen twelve percent in the past month. U. S. Small cap value is represented by the banker. Small cavalry etf V B R is increased one and a half cent in the past month, and outside of the U. S, small cap value is only down four and eight percent.

Who is that perform us growth by eight percent? This is a theme that we've been discussing on acid camp and money for the rest of us for a number of months now. Back in march, I believe we released up four seventy six on why you shouldn't abandon small cap stocks.

We talk about his interest rates for that will help small cap stocks with smaller companies need to have more variable ate debt, have more debt overrated. And so their debt service and costs should be falling as rates fall. That will help corporate profits.

And there is so much less expensive than large cap growth stocks. If we just look, for example, at the Price to earnings ratio based on expected earnings. So what are investors willing to pay for one dollar of expected earnings?

For U. S. Growth is thirty as a four P.

E. Of thirty. The long term average is twenty. That's almost two standard deviations greater than the long term marriage, which means it's extremely Pricey. Y, if we compare that to world X, U, S, smoke up value, the four rep is eleven, almost twenty point difference between the two, and that forward, P, E, for world X, Y, song value is almost one standard deviation, cheaper than the long term marriage.

So when you have these huge valuation disparately, one area, the market more expensive than its long term marriage, the other cheaper than as long term marriage. The expectant earnings growth for us growth is over twenty two percent and very, very high growth expectations in those growth stocks are now because of some of the earnings disappointment, the growth stocks sold off. Meanwhile, expected learnings growth for small cap is low double digits, so not quite a greater expectation.

There is a potential opportunity to rebaLance the growth into smoke value. We should use and can use market dislocations to assess arap our portfolio, consider whether now a time to rebounds other opportunities. I did that last week with casual the fall.

I reinvested some of my cash in other opportunities. We released a number episodes earlier this year on locking in higher yields in case interest rates for. And one of the things that we talked about, we're bult.

f. So last week, I bought a ability tf. The bullet shares twenty thirty one corporate bond, T, F, B, S, C, V. And I used some of my cash, and i'll be able to lock in a five percent yield at five percent. Analysts expect to return over the next seven years with that investment finding IT out of cash, I initiated another position that isn't so much lacking in yell, but it's lucking in something we talked about. Couple episodes upset eighty five.

On defined outcome buffer etf, I mentioned that I shares had come out with a new when the large cap max buffer etf M A X J IT will pay up the ten percent based on the Price gain in the I shares core S M P five hundred etf. So if IT goes up ten percent, then etf would earn ten percent. On the other hand, IT protects against any losses below than that asseveration with the sell off in legal early August.

I want to had to add that to my portfolio with the idea of monitoring these fer etf. And if we get close to that cap, then i'll rotate into a different buffer etfi sort of a buffer ef rotation strategy. And I I looked to IT in that episode that what i'm going to try IT, that's the other change I made.

And finally, I invested some more in an area that I have had in my portfolio since early twenty twenty three when we did an episode on colorizing loan obligations. That was episode four twenty three, and we went into a great deal, a detail about the opportunity there. I invested in the black rocks triplet or increased my allocation because it's yielding six point eight percent.

Now that yield will come down when the federal serve reduces its policy rate, but it's still an attractive yield. And so I took advantage of that. And overall, that reduced my cash exposure from ten percent down to around six point six percent.

And how could you need to look at opportunities as policy rates are lower in conclusion then? So when we look at where we are now, what caused to sell osm disappointing employment report IT was some policy rate changes on the part of the bank of japan, which LED the strengthening of the end, the undoing of the kerry trade, that injected volatility. But there isn't a bunch of bad news.

A recession is not imminent. We could give a slowing economy because we've had higher interest rates for a while now and that can have an impact. But IT, there's also some in bedded fiscal stimulus happening in terms of lower bound yields, lower mortgage rates and the fiscal stimulus from higher than ever deficit.

So that's where we are economically. We know that cash ods are going na be lower and we can lock in yields if you haven't done so already. And the other thing we can recognize this, there's a true benefit to period checkpoint s.

So why we do a monthly investment conditions and strategy report for money for the restless, plus we do a monthly user weapon on for asia camp, so we can come together, see what change, see if we need to do anything, where the risk, where the opportunities, put things in the perspective, iza worries, stop the fear and panic, look at the markets objectively, assess where we are, and then make any changes if need be. Most of the time we don't, but it's good to know where. You've just check in intrada ating bomb barred by news and news and news every single day.

A former checking like we've done today can be very, very helpful. And it's why we offer some premium services where we offer that on a regular basis. That's episode for eighty nine.

Thanks for listening. You may be missing some of the best money for the rest of us content. Our weekly inside guide email news letter goes beyond what we cover in our podcast episodes and helps elevate your investment journey with information that works pressed in, written in visual formats.

With the insiders guide, you can discover actionable investing insights provided only to our new sutter subscriber, unlock greater investing confidence with high value snipers from our premium products plus membership and asset camp access exclusive news offers an events you won't hear about anywhere else. Further connect with the money for the restless team and community. And when you sign up, i'll also send you our exclusive investing checklist to help you invest with more confidence right away.

The inside of guide is the best next step to get the most out of your investment journey. If you're not on the list, go to money for the rest of us, dot com and subscribe with to become a Better investor sign up box. Everything I shared with you in this subsystem for general education, i'm not considered your specific risk situation.

We've not provided investment advice. This is simply general education on money investing in the economy. Have a great week.