Message From the CEO
Many of you reading this will be sending your kids off to school in the next week or two. Hopefully you stocked up on school supplies and snacks.
Read on for a quick update on the market and a few other news items you should know.
The Dog Days Of Summer…
If you’re a long term investor, the fact that the market is approximately flat month-to-date means you spent the past few weeks enjoying the warm weather, relaxing on the beach, or just generally soaking in the last bit of Summer.
But if you’re the type that follows the markets more closely, you may have noticed some rather large swings recently. We went down (by a alot) and then up (by a lot). What caused this and what does it mean going forward?
What the heck is a Carry Trade?
It’s always hard to pinpoint one specific cause for market movements, given that there are always 200 notable things happening in any given trading day. Some companies reported earnings above/below expectations, some economic indicator came in better than expected, etc. But the recent huge swings can be fairly reliably assigned to the Japanese Carry Trade. So – what on earth am I talking about?
In plain English, a carry trade involves borrowing money in one currency where it’s cheap, and investing it in another currency where it’s not. For example, up until recently, you could borrow some Japanese Yen at 0% (or even negative), convert it into US Dollars, and invest it in American stocks (or leave it in cash and earn 5% or more). Hypothetically the exchange rate between JPY and USD would be set at a point where the returns you could make in Dollars might be higher than in Yen, but only a reasonable amount (ie, there’s no free lunch). You take some risk by converting the currency and are rewarded for it. The plan works pretty well until..
The Bank of Japan starts raising rates. Suddenly all the Yen you borrowed is more expensive. Now the returns you were hoping to earn in Dollars have evaporated (since your original cost just went up). So you need to get out of your USD positions so you can repay the Yen you borrowed. How do you get out of your positions quickly? You sell everything you can. Right now. Sell sell sell. And when that happens you get giant losses in the market like you saw early last week.
Now that that particular trade has been unwound, does that mean we’re done having giant movements up/down? Nope – but next time it happens it (probably) won’t be because of Yen.
News around the globe
Stock market today: Stocks rise as key inflation measure increases at slowest pace since 2021
US stocks edged mostly higher Wednesday as Wall Street embraced another encouraging signal on consumer prices that is set to help shape the near-term future of interest-rate policy…. Read more…
Panicking About Market Volatility? Don’t Lose Money Chasing the Crowd
Our tendency to pay attention to and learn from others has allowed humans to do incredible things. However, this can also lead us astray, because it makes us prone to herding behavior… Read more…
The Federal Reserve’s recent meeting hinted at a rate cut coming this September, but it’s not guaranteed. MarketWatch markets reporter Isabel Wang breaks down what this could mean for investors and consumers… Read more/listen
We hope you enjoyed our mid-monthly newsletter and gained some insights. As always we strive to keep you updated on the news affecting the market and news that means more than just a short story. If you have any questions or recommendations/want to learn about, feel free to reach out!