Serenity Now! Emergency Markets Edition
Welcome to the Cutting Room Floor, a newsletter where I round up all my personal finance articles, put out exclusive content and interviews, and flag my favorite job listings from around LinkedIn.
You know those rides at state fairs, where they crank you up to the top of a big tower, only to drop you straight down?
That feeling deep down in the pit of your stomach?
Yeah, that was last week in the markets. We all experienced a little moment of freefall, when we weren't exactly sure what was beneath us, and how long it was going to last. What we thought was solid, was not actually solid at all.
Thankfully things seem to have stabilized since then, but that day was a helpful reminder that chaos can happen at any moment. I was in Croatia at the time, eating burek and touring Game of Thrones locations, so I couldn't really do much except watch with bemusement!
In times like these, I do what I usually do: Talk to someone smarter than me, to figure out what the hell happened.
In this case that would be Liz Young Thomas , head of investment strategy at SoFi . She has a unique ability to break down complicated matters in ways that the rest of us can understand.
Exclusive for this newsletter, we talked about this scary market moment, and what it means for the rest of 2024.
Q: That Monday plunge scared a lot of people, so what’s your take on what happened?
A: I think it was a culmination of factors. Coming into that Monday, people were a little bit rattled from a weak jobs report. That was the first scary one we got, showing that the unemployment rate rose more quickly than expectations. The markets were struggling with how to interpret that, and figuring out what the Fed might have to do differently.
Then over the weekend there was the risk everybody knew of, the yen carry trade. With the strengthening of the Japanese yen, that risk grew, and came to a crescendo after the Bank of Japan raised rates. That catapulted volatility in Japan, hitting circuit breakers across the markets. That sent U.S. markets into a tailspin.
There was a calming in volatility through the rest of the week, so it was a bit of an overreaction and felt very panicky in the moment. But I say that with the caveat that you don’t typically have days of volatility like that that are one-and-done. I don’t think it’s the last bout with volatility that we’ll see.
Q: The markets seem to have bounced back, but in the economic numbers do you see any cause for concern?
A: Economic data in the U.S. is in an almost perfect position. Things have cooled to the point where inflation is not too much of a concern anymore, the labor market is better balanced, growth has slowed but not stopped, consumers are not overextending themselves. Things have definitely slowed down, but not to a concerning level, so right now we’re in a good place.
The problem with economic data is that it’s always backward-looking. It’s telling us we were in a good place in a previous period. The concern right now is what’s next – and that’s what markets are hanging on.
Q: We’re almost certain to see rate cuts soon, so how will that affect the playing field?
A: It’s a little perplexing to me why markets want rate cuts so badly. If the economy is solid, there’s no big reason for the Fed to be cutting, except to normalize policy down to a steadier state from our current restrictive level. The interesting part about where we are now is that the longer they wait, the shorter amount of time they will have to react to data.
I think they probably should have been cutting already. Now we’re in a position where data has weakened, things have gotten cooler, and people are expecting a .25% rate cut if not .5%. Expectations have gotten volatile, and that results in market volatility.
Q: For investors, are there pockets of value in this market?
A: At this point in the cycle, you don’t just look at valuations, you look at what’s happening in the bond market. If and when rate cuts begin, certain sectors tend to do well in that environment. Those would be utilities, consumer staples, healthcare, and energy.
That’s not just a purely defensive play: A lot of those stocks pay healthy dividends, and dividend payers should do well. They have trailed the rest of the market, so their valuation is looking more attractive.
Q: Since investors seem a little on edge, where can they find some safety?
A: I still think Treasuries offer opportunity. Any weakness there, you can look at as a buying opportunity to build up your position. Maybe they are not as attractive as six months ago, but they are still good value, since yields haven’t been this high in a long time.
Q: Any pieces of data you are keeping your eye on, that will tell us where we’re headed?
A: The labor market holds the key for the rest of the year. The focus has shifted off inflation. The speed at which it moves will be particularly telling – I’m watching things like the unemployment rate, initial jobless claims, and JOLTS job openings, which are the first things to weaken before layoffs happen.
Q: What else do investors need to know right now?
A: One of the things that people have been conditioned for in this cycle, is the idea that the Fed is going to save everything. Of course they are always there to support markets, if financial stability is under threat or in the event of a big shock.
But what happened last Monday, all the chatter was way overdone. The Fed is not there to react just because the market went down. We’ve been conditioned to think that anytime this happens, the Fed will take out a magic Band-Aid. I don’t think the Fed wants to do that, or should do that. This expectation that the Fed will just push a button anytime things get jittery – markets need to get away from that.
Thanks Liz for talking us all off the ledge ... and be sure to follow her on Twitter/X, or check out her podcast here!
______________________________
Golden Rule: Why Millennials Love Gold
Speaking of market pandemonium and investors scrambling for safety ... here's a timely piece I did recently for Reuters about everyone's favorite yellow metal.
The news hook: It's actually younger investors who seem to be most interested in it.
Weird, right? You might assume that gold is more of a traditional Boomer thing, and that Millennials and Gen Z would be distracted by shiny things like crypto.
Not necessarily so. Among wealthy investors under age 43, 45% own physical gold as an asset, and another 45% are interested in owning it, according to a survey by 美国银行 . Meanwhile 美国道富银行 fund that Millennials have the highest gold allocation in their portfolios, at 17%, far surpassing both Gen X and Boomers (10%).
The takeaway: While gold shouldn't be the main entree for your portfolio, it can definitely serve as a useful side dish.
Read more here:
______________________________
领英推荐
Fun numerical tidbits from my overflowing inbox
22%: Percentage of Baby Boomers who expect to leave an inheritance, according to new data out of Northwestern Mutual . This might come as a bit of a shock to their kids, who likely expect a slice of the $90 trillion "Great Wealth Transfer"! For instance, 38% of Gen Z are expecting a bequest of some sort, and 32% of Millennials. There's a disconnect shaping up here, which could lead to some family fallout down the line, but the gist is: Your folks may not have as much as you think.
$40.39: Average amount that people report spending on monthly subscriptions, according to a study by Self Financial, Inc. The average household has 4.1 active paid subscriptions, and 85.7% of people have at least one that goes unused every month. The average value of those unused paid subscriptions is $32.84 - and that's just what we know about, so I would guess that figure is on the low side, since there are plenty of subscriptions that we have forgotten about altogether (after free trials, etc.) If you're drowning in this stuff, try a service like Rocket Money to start cancelling.
$313,939: Average cost of raising a kid, according to a report from MarketWatch Guides about couples that are 'Double Income No Kids' (DINKs). Since the question of having children is very much in the news, thanks to various interviews with VP candidate JD Vance ... the survey reveals that 92% of DINKs say there are significant financial benefits to not having children (no kidding!). They are four times as likely as parents, to say that they have no financial stress -- and they save twice as much money every month. My take is that it's a highly personal decision, and certainly an expensive one -- and if you don't want to have kids, don't have them! You are no more or less valuable as a human being.
______________________________
"Elon Musk's Surging Political Activism," Jon Lee Anderson, The New Yorker
"We're Entering An AI Price-Fixing Dystopia," Roge Karma , The Atlantic
______________________________
______________________________
As always, feel free to get in touch via Twitter (here), or email ([email protected]), or by DM on LinkedIn -- to suggest story ideas, or ask money questions, or hire me as a freelancer, or sponsor this newsletter, or broadcast your job opening.
Until next time!
-CT