ME Cio Weekly Letter
ME Cio Weekly Letter
ME Cio Weekly Letter
August 5, 2024
All data, projections and opinions are as of the date of this report and subject to change.
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MACRO STRATEGY
The Ghosts of August: What’s Spooking the Markets and Where do
We Go from Here?
Joseph P. Quinlan, Managing Director and Head of CIO Market Strategy
Investment Implications
It’s early August but the month is already living up to its reputation as being among
the most volatile for the capital markets. In brief, here are six factors creating We expect the markets to remain
concerns and volatility in the markets: volatile and choppy over the near-
term but continue to recommend
Concern #1: The Fed is behind the curve in cutting interest rates in the face of that investors buy on weakness
weakening U.S. economic indicators, namely the jump in the U.S. unemployment and stay in the market.
rate to 4.3% in July. The economy added only 114,000 jobs last month, the slowest
rate of gain since last year. The jobless rate has climbed by nearly one percentage
point in the past year and comes alongside other factors pointing to slower
economic growth like the downturn in manufacturing Institute for Supply
Management Purchasing Managers’ Index and rising credit card delinquencies. The
fed funds futures market is now pricing in an 85% probability of a 50 basis point
(bps) cut in September and a 63% probability for another 25 bps in November.
Concern #2: That U.S. and Chinese consumers are pulling back and retrenching,
undercutting the twin engines of global consumption since the U.S. and China,
combined, account for a staggering 44% of global consumption according to figures
from the United Nations. While Q2 U.S. earnings have come in solidly in most cases,
one underlying theme from a number of firms has been flagging/weakening U.S.
consumer demand amid higher costs of goods and services. Both discretionary and
non-discretionary spending in the U.S. has softened this year, prompting concerns
that the almighty U.S. consumer, accounting for nearly 70% of U.S. gross domestic
product, is set to rollover. While lower income households in the U.S. have pulled
back on spending this year, the negative wealth effects from swooning U.S. Equities
could cool spending among higher-income households in the months ahead, piling
on more downside pressure on U.S. economic prospects.
Concern #3: The unwinding of the AI trade as investors start to question the
massive capital spending plans of Large-cap technology companies juxtaposed
against when the transformational effects of AI will begin to pay off for technology
firms and the economy in general. U.S. technology leaders have spent billions on the
buildout of the AI infrastructure this year, and signaled to investors they were not
done during Q2 earnings calls. The messaging didn’t go down well, triggering a
rethink and selloff along the technology complex as investors weigh the costs of the
AI revolution versus expected returns. Not helping matters, the unwinding of the yen
carry trade.
Concern #4: The unwinding of the yen carry trade as the Bank of Japan (BoJ) raises
rates much faster-than-expected and pulls back on bond buying. A hawkish BoJ is a
clear signal that the decade of ultra-easy monetary policy is over in Japan; the yen
has surged by over 13% since July 10, undermining the popular yen-funded carry
trade among investors. Meanwhile, as a funding currency, the yen has helped fuel
and fund demand for U.S. technology stocks—ergo, the unwinding of the yen carry
trade has filtered into the downdraft in U.S. big technology. It’s also hammered the
technology-heavy indexes of Taiwan and South Korea—technology makes up 78%
of the MSCI Taiwan Index and nearly 50% of the MSCI South Korea Index.
Concern #5: That the U.S. election will be tighter than originally thought given that
Kamala Harris, not President Biden, has emerged as the Democratic nominee. Prior
to President Biden stepping aside, the markets grew comfortable with the notion
that Donald Trump would be re-elected president in November, taking out the
drama and uncertainty of the November vote. The script has been flipped, however,
Gray bars represent recessionary periods. Note: The numbered bear markets correspond to the following events: 1) Post dot-com
bubble, 2) Global financial crisis, 3) Europe sovereign debt crisis, 4) U.S. credit downgrade, 5) China currency devaluation,
6) Pandemic. Sources: Bloomberg, Yardeni Research. Data as of August 5, 2024. Indexes are unmanaged and do not take
into account fees or expenses. It is not possible to invest directly in an index. Past performance is no
guarantee of future results.
1
Volatility Index.
107
June 28, 2024
105
103
101
99
97
95
7/1/2024
7/3/2024
7/5/2024
7/7/2024
7/9/2024
7/11/2024
7/13/2024
7/15/2024
7/17/2024
7/19/2024
7/21/2024
7/23/2024
7/25/2024
7/27/2024
7/29/2024
7/31/2024
Bloomberg Mag 7 Index referenced. Source: Bloomberg. Data as of July 31, 2024. Performance results are extremely short term
and do not provide an adequate basis for evaluating performance potential over varying market conditions or economic cycles.
Indexes are unmanaged and do not take into account fees or expenses. It is not possible to invest
directly in an index. Past performance is no guarantee of future results.
2. “Small-cap Summer” argues for diversification: Expectations for easier monetary
policy were pulled forward after a promising consumer price index report last month,
lifting interest rate-sensitive areas of the market. Small-caps, which typically benefit
from lower borrowing costs due to higher debt levels, saw an especially impressive run-
up. The Russell 2000 returned an eye-popping 10.2% in July, marking the third-largest
monthly outperformance versus the S&P 500 on record (Exhibit 3). An anticipated
profits recovery also provided a boost amid estimates for YoY Small-cap earnings
growth to flip positive and slightly outpace S&P 500 YoY earnings growth beginning in
Q3. 4 While Small-caps took the spotlight last month, it’s worth noting that the rally
extended to other unloved areas of the market, including Value-oriented, cyclical
pockets. Real Estate and Financials were among the top-performing sectors in the S&P
2
Magnificent 7: Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms and Tesla.
3
Bloomberg. Data as of July 31, 2024. Refers to decline in the Bloomberg Mag 7 Index from 7/10/2024 to 7/30/2024.
4
FactSet Earnings Scorecard. Data as of July 30, 2024. S&P 600 Index vs. S&P 500 Index estimated YoY earnings per
share growth for Q3 2024 referenced.
5
0
-5
-10
Apr-80
Aug-82
Apr-87
Aug-89
Apr-94
Aug-96
Apr-01
Aug-03
Apr-08
Aug-10
Apr-15
Aug-17
Apr-22
Feb-79
Oct-83
Dec-84
Feb-86
Oct-90
Dec-91
Feb-93
Oct-97
Dec-98
Feb-00
Oct-04
Dec-05
Feb-07
Oct-11
Dec-12
Feb-14
Oct-18
Dec-19
Feb-21
Jun-81
Jun-88
Jun-95
Jun-02
Jun-09
Jun-16
Jun-23
Source: Bloomberg. Data as of July 31, 2024. Indexes are unmanaged and do not take into account fees or expenses. It is not possible to invest directly in an index.
Past performance is no guarantee of future results.
3. VIX spike highlights importance of discipline: After an unusually sanguine stretch
for markets, measures of equity market volatility sprang back to life during July’s market
tumult. Churn extended into the early trading days of August, with the Chicago Board
Options Exchange VIX closing above 23 for the first time since March 2023. After a
period of relative tranquility, this development serves as an important reminder that
volatility is considered normal. The VIX’s long-term average is 19.5, and surges well
above that figure are not uncommon. Take the turbulent market of 2020, for example,
when the VIX closed above the 25 level 154 times throughout the year (Exhibit 4).
Market pullbacks, which often accompany higher volatility, are also common, with 5%
drawdowns occurring three times a year on average for the S&P 500 since 1930. 7 Last
month’s churn highlights the importance of having a disciplined investment plan in place
to weather the market’s inevitable twists and turns.
Investment Implications: The potential for episodic volatility persists amid the upcoming
U.S. presidential election, softening economic data and elevated geopolitical risk. We
emphasize the importance of staying invested during periods of uncertainty and continue to
see market weakness as a buying opportunity for long-term investors.
Exhibit 4: Spikes in Volatility, While Subdued as of Late, Are Historically Common.
# of days that the VIX closed above 25
175
150
125
100
75
Average since 2000
50
25
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
Source: Bloomberg. Data as of July 31, 2024. Indexes are unmanaged and do not take into account fees or expenses. It is not
possible to invest directly in an index. Past performance is no guarantee of future results.
5
Bloomberg. Data as of July 31, 2024. Russell 1000 Value Index and Russell 1000 Growth Index referenced.
6
Bloomberg. Data as of July 31, 2024.
7
BofA Global Research. November 3, 2023. Latest data available.
-5%
-10%
-15%
-20%
-25%
-30%
Equities
Total Return in USD (%) Economic Forecasts (as of 8/2/2024)
Current WTD MTD YTD 2024E Q1 2024A Q2 2024A Q3 2024E Q4 2024E 2025E
DJIA 39,737.26 -2.1 -2.7 6.6 Real global GDP (% y/y annualized) 3.2 - - - - 3.3
NASDAQ 16,776.16 -3.3 -4.7 12.2 Real U.S. GDP (% q/q annualized) 2.7 1.4 2.8 2.5 2.0 2.2
S&P 500 5,346.56 -2.0 -3.2 13.0 CPI inflation (% y/y) 2.9 3.2 3.2 2.7 2.5 2.2
S&P 400 Mid Cap 2,948.01 -4.1 -4.8 6.9 Core CPI inflation (% y/y) 3.4 3.8 3.4 3.2 3.1 2.7
Russell 2000 2,109.31 -6.7 -6.4 4.9 Unemployment rate (%) 3.9 3.8 4.0 4.0 4.0 4.1
MSCI World 3,448.80 -2.1 -3.4 9.8 Fed funds rate, end period (%) 5.13 5.33 5.33 5.38 5.13 4.13
MSCI EAFE 2,291.33 -2.0 -3.8 4.3
MSCI Emerging Markets 1,061.23 -1.0 -2.2 5.5 The forecasts in the table above are the base line view from BofA Global Research. The Global Wealth & Investment
Management (GWIM) Investment Strategy Committee (ISC) may make adjustments to this view over the course of the
Fixed Income† year and can express upside/downside to these forecasts. Historical data is sourced from Bloomberg, FactSet, and
Haver Analytics. There can be no assurance that the forecasts will be achieved. Economic or financial forecasts are
Total Return in USD (%)
inherently limited and should not be relied on as indicators of future investment performance.
Current WTD MTD YTD A = Actual. E/* = Estimate.
Corporate & Government 4.26 2.35 1.50 3.08 Sources: BofA Global Research; GWIM ISC as of August 2, 2024.
Agencies 4.25 1.42 0.96 3.32
Municipals 3.42 1.03 0.95 1.46
U.S. Investment Grade Credit 4.35 2.43 1.58 3.21 Asset Class Weightings (as of 7/9/2024) CIO Equity Sector Views
International 4.94 2.06 1.20 3.11 CIO View CIO View
High Yield 7.70 -0.05 -0.31 4.26 Asset Class Underweight Neutral Overweight Sector Underweight Neutral Overweight
90 Day Yield 5.17 5.29 5.28 5.33
slight over weight green
Global Equities
slight over weight green
Energy
2 Year Yield 3.88 4.38 4.26 4.25
Neutral yellow
Healthcare
10 Year Yield 3.79 4.19 4.03 3.88 U.S. Large Cap Value
Slight over weight green
30 Year Yield 4.11 4.45 4.30 4.03 Consumer slight over weight green
slight over weight green
Industrials
Commodities & Currencies International Developed
Slight underweig ht orange
Total Return in USD (%) Information Neutral yellow
Neutral yellow
Services
slight over weight green
U.S. Governments
WTI Crude $/Barrel†† 73.52 -4.7 -5.6 2.6 Slight over weight green Neutral yellow
Gold Spot $/Ounce†† 2443.24 2.3 -0.2 18.4 U.S. Mortgages Financials
Slight underweig ht orange
U.S. Corporates
Neutral yellow
Real Estate
Total Return in USD (%) International Fixed Income
neutral yellow
slight underweig ht orange
Utilities
Prior Prior 2022 Slight underweig ht orange
EUR/USD 1.09 1.09 1.08 1.10 Tax Exempt Consumer underweight red
USD/JPY 146.53 153.76 149.98 141.04 Staples
Slight underweig ht orange
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The Chief Investment Office (“CIO”) provides thought leadership on wealth management, investment strategy and global markets; portfolio management solutions; due diligence; and solutions
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