Let’s breakdown all the wild market action from this week and how investors at home should evaluate it. Low macro visibility is causing big problems. True, there is not a lot of confidence in a soft landing, but investors are all over the map on where the economy is going. Because of that, it has turned into a good news/bad news market. Watching the yen Here’s the good news: We appear to be decoupling from the Japanese yen carry trade. The currency strengthened dramatically into Monday on fears of higher rates in Japan, but Bank of Japan officials appear to have blinked, affirming they would not be raising rates when the market is this unstable. FXY 5D mountain Invesco CurrencyShares Japanese Yen Trust The exchange-traded fund of the week, the Invesco CurrencyShares Japanese Yen Trust (FXY) , which tracks the price of the yen, has dropped two days in a row. This indicates the currency is declining. Watching Wall Street’s ‘fear gauge’ And now the bad news: The muddy macro outlook, combined with a weak seasonal period, will likely keep the Cboe Volatility Index (VIX) elevated. With Wall Street’s “fear gauge” still near 30, investors are expecting twice as much daily volatility as when the VIX is at 15, which was only a few weeks ago. .VIX YTD mountain Cboe Volatility Index in 2024 That is literally what the VIX measures: expectations for volatility over the next 30 days. The VIX futures curve remains in backwardation . That is, the price of the cash VIX and front-month VIX futures contracts (August, September and October) are higher than contracts that are further out. That is unusual, and it’s a sign that investors expect concerns about the macro environment and seasonality to persist for the next several months. Traditionally, August through October marks the weakest period of the year. Watching the economy The good news: The consensus still seems to be that currently we are not in a recession, which JPMorgan Chase CEO Jamie Dimon affirmed on our air Wednesday afternoon. The bad news: The economy is slowing — it’s just not clear how much. Travel and hotel companies have indicated a modest slowdown is underway. Correction vs. ‘flash crash’ vs. bear market The good news: So far, this is a garden-variety correction, with the S & P 500 down roughly 10% from its all-time high at Monday’s low of the session. There is an old saying: The difference between a correction and a bear market is that a correction is about people worrying about bad things happening. A bear market is where bad things really do happen. “We have the former, but not the latter,” Alec Young, chief investment strategist at MAPsignals, told me. Was Monday a ‘flash crash’? I bet you haven’t heard that phrase in a long time. A “flash crash” is a sudden and severe price drop that lasts for a very short period, usually a few hours. Is that what happened on Monday? Mark Higgins, senior vice president at Index Fund Advisors and author of “Investing in U.S. Financial History: Understanding the Past to Forecast the Future ,” thinks it might fit the criteria. “It appears that the sell-off of August 5th qualified as a flash crash, although it was rather modest by historical standards,” he told me. Whatever you want to call what happened on Monday, a key lesson during these periods of market turbulence is that most investors should do absolutely nothing . “The same thing [panics over real or imagined recessions] has happened not only before but multiple times before,” Higgins, a student of financial history, told me. Almost invariably, selling during panics is a mistake for long-term investors. Don’t let your emotions get the best of you, Higgins said. His best advice: Act like you’re 200 years old and you have seen this all before. “If you think like a 2-year-old you are going to do dumb things,” Higgins said. “A 2-year-old sees everything for the first time. If you think like a 2-year-old, you’re going to overreact.” “Instead, think like a 200-year-old,” he said. “If you’re 200 years old, you’ve seen this many times before. You’re better off sticking to a long-term plan.” Higgins retold a story about an investor during the October 1987 crash , which saw the Dow Jones Industrial Average drop 22.6%. “My family ran funeral homes for about 150 years,” he told me. During the 1987 flash crash, Higgins said an investor was trying to orchestrate trades on the phone while he was preparing to go to his relative’s funeral. “His uncle [who was a police officer] pinned him against the wall and threatened to punch him out if he didn’t hang up the phone and get in the limo to go to church,” Higgins told me. “Not only did it spare him alienation from the family, but it also probably saved him a lot of money,” he said.
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