U.S. employment data and the rate hike by the Bank of Japan sparked widespread nervousness worldwide, leading to declines in all major global stock markets. However, the question that arises for analysis is whether the dramatism of the chain sales was premature and whether what is happening this Monday is just a temporary “perfect storm.”
For James Eagle, founder of Eeagli, it was a perfect storm based on inflation fears, less hope for interest rate cuts, concerns about the upcoming U.S. elections, and global tensions, as he posted on LinkedIn. Additionally, the renowned content creator said that if you add to that scenario that some tech stocks have reached all-time highs, you get an ideal recipe for market nervousness.
“All you need now is an excuse to panic. And we got it,” Eagle summarized.
On the other hand, Tiffany Wilding, an economist at PIMCO, reviewed the employment data released last week, with a figure lower than “expected and further proof that the U.S. economy is slowing down,” she said in a statement accessed by Funds Society. However, the unemployment rate rose to 4.25% unrounded, nearly reaching the so-called Sahm rule, which in the past has been a reliable indicator of recession.
According to Wilding, although the main figures were weaker than expected and certainly reflect a slowing economy, there are some exceptions in the details that show it has not yet sunk.
For PIMCO, this consolidates a Fed rate cut in September and increases the risk that the Fed will revise its forecasts to signal a faster pace of cuts in the future. In this regard, the upcoming employment report and the recovery from July’s weakness will be key to setting the tone for the Fed’s September meeting, Wilding concludes.
Meanwhile, Fernando Marengo, Chief Economist at BlackToro Global Wealth Management, told Funds Society that last week’s data shows a soft landing scenario. And this outlook is not the most favorable for stock valuations in the tech sector, which had implied continued sales growth.
Furthermore, Marengo explained that the new macroeconomic data and equity values, which had been rising steadily since the fourth quarter of last year, prompted some of the market to take profits. At the same time, the professional warned about a “flight to quality.”
“Clearly, those who made a big profit are trying to capitalize on that gain in the face of a new scenario of uncertainty: first of slowdown and now of uncertainty, because the drop in asset prices clearly has an impact on families, there is a loss of wealth in the drop in assets,” he summarized, noting that a recession cannot be ruled out and that increases nervousness in the markets.
However, he also believes that these soft landing levels are not worrisome either.
“The Fed is fulfilling its dual mandate, full employment with price control. This would not justify a cut in monetary policy rates. Now, if the capital market crisis deepens and this starts to have an impact on the balance sheet of some sector of the economy, it will surely be necessary for the Fed to take action. Otherwise, we will have to wait for the September session,” he insisted.
BlackToro has been recommending for “some time” to reduce risk exposure and primarily invest in fixed income. Marengo explained that the strategy is “to make rates on the short end of the curve and extend duration on the treasury bond curve.”
“Since May, we started rotating our portfolio, we started moving out of the more aggressive stocks and moving into more defensive sectors. We moved out of tech and went into more value, much more defensive companies. Therefore, our portfolios are capitalizing on our strategies that we had been seeing from our teams,” he added.
The executive argued that it will always depend on the profile of each investor, but he maintained that it is not a time to take risks and wait “until uncertainty and volatility decrease.”
In another opinion, Santiago Ulloa, Managing Partner of We Family Offices, also thought that the market reaction was “exaggerated, accelerated by systematic trading as stop losses were surpassed.”
However, for Ulloa, based in Miami, the Fed will have to accelerate and increase rate cuts compared to what was thought a few months ago.
Regarding investment recommendations at this time, Ulloa told Funds Society that it depends a lot on their current asset diversification.
“I think any move has to be prudent, but for those who are not in the stock market and want to be, it could be a good time to start buying gradually. In any case, volatility will continue, and one must look at the long-term strategy for each person,” he concluded.
