This is Brad Barrie, Chief Investment Officer and Portfolio Manager with Dynamic Wealth Group.
Welcome to this market and economic update. In this video, we’ll discuss recent stock market swings and how the unwinding of the carry trade in Japan may have worsened the fragility of global markets.
Markets recently experienced a spike in global uncertainty with the VIX, a measure of volatility in the stock market, reaching a level not seen since the pandemic. This was due to concerns around U.S. economic growth, Fed rate cuts, and tech earnings.
However, it may have also been worsened by the unwinding of the Japanese carry trade. What is a carry trade and how is that linked to U.S. and global stocks?
While it may seem complex, the concept of a carry trade is actually quite easy to understand. A carry trade simply involves borrowing at lower interest rates and investing at higher interest rates, thereby earning the difference in yields. This also requires buying and selling currencies since investors will often utilize government bonds around the world. In general, carry trades are more attractive when there is a large difference in interest rates and when currencies are stable.
This chart shows the yield on a 10-year U.S. Treasury bond and the equivalent yield on a 10-year Japanese Government Bond with the shaded blue representing the spread between them. It shows that the spread has historically been large, presenting an opportunity for investors to earn strong returns through carry trades.
However, Japan has recently started to raise interest rates while at the same time here in the United States the Fed is expected to begin cutting as soon as next month. In anticipation of this spread narrowing, traders began unwinding their positions, causing a drop in Japanese and global stocks as volatility increased.
Next, this chart tracks major global currencies over the past 24 months with the value of each currency reindexed to 100 at the start of the period. As you can see, many of these currencies have experienced volatility over this period, but none more so than the Japanese yen this past week (as shown with the light blue line).
When the Bank of Japan raised rates while economic data indicated that the Fed would soon lower its rates, the relative value of the yen shot up. The carry trade, which involves borrowing in currencies from countries with low interest rates, in this case, Japan, and investing in higher yield assets unwound rapidly, sending shockwaves across global markets last week.
However, the situation has since stabilized and the yen is beginning to trend back closer to previous levels.
Finally, this chart shows stock market corrections and recoveries going back to World War II. Market corrections are defined as declines beyond 10% but no more than 20% from the most recent all-time high.
In the average correction over this period, the S&P 500 fell 14.3% from peak to trough over the course of about five months. Recoveries typically occur more quickly, taking just four months on average. Most importantly, these recoveries tend to begin when investors least expect them. At Dynamic Wealth Group one of our core philosophies is not to attempt to predict the future, but instead to prepare for the future, regardless of what may happen. We target this by following our Multi-Dimensional Asset Allocation Approach.
In light of recent technical factors driving markets, it’s crucial for investors to remember that in the long run, markets are driven by economic growth and corporate earnings. These fundamental factors tend to propel markets higher over time, despite periodic setbacks. Despite recent market swings, staying invested in a truly diversified portfolio is essential to staying on track toward financial goals.
We hope you found these high-level insights helpful. If you are a financial advisor and would like more information on our Multi-Dimensional Approach towards asset management, feel free to download our eye-opening whitepaper titled, “Busting seven risk and return myths”, click the link below or visit our website DynamicWG.com, or emailing us at: Info@DynamicWG.com. If you are an individual investor, we are happy to address any questions you may have and put you in touch with a qualified advisor if so desired. Until next time, take care everyone, and make smart, logical & fact-based financial decisions.
Disclaimer:
Clearnomics and Dynamic Wealth Group, LLC are not affiliated entities. No part of this should be taken as investment advice. Consult your financial advisor for specific investment recommendations tailored to your specific situation.
Dynamic Wealth Group (“Dynamic”) is an SEC registered investment adviser. SEC registration does not constitute an endorsement of Dynamic by the SEC, nor does it indicate that Dynamic has attained a particular level of skill or ability. This material prepared by Dynamic is for informational purposes only. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy, or investment product. Opinions expressed by Dynamic are based on economic or market conditions at the time this material was written. Economies and markets fluctuate. Actual economic or market events may turn out differently than anticipated. Facts presented have been obtained from sources believed to be reliable. Dynamic, however, cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source.
Dynamic does not provide tax or legal advice, and nothing contained in these materials should be taken as tax or legal advice.
Any reference to an index is included for illustrative purposes only, as an index is not a security in which an investment can be made. Indices are unmanaged vehicles that serve as market indicators and do not account for the deduction of management fees and/or transaction costs generally associated with investable products. Past performance is no guarantee of future results. Actual returns may be lower.
< Commentary
Carry Trade & Market Fragility
This is Brad Barrie, Chief Investment Officer and Portfolio Manager with Dynamic Wealth Group.
Welcome to this market and economic update. In this video, we’ll discuss recent stock market swings and how the unwinding of the carry trade in Japan may have worsened the fragility of global markets.
Markets recently experienced a spike in global uncertainty with the VIX, a measure of volatility in the stock market, reaching a level not seen since the pandemic. This was due to concerns around U.S. economic growth, Fed rate cuts, and tech earnings.
However, it may have also been worsened by the unwinding of the Japanese carry trade. What is a carry trade and how is that linked to U.S. and global stocks?
While it may seem complex, the concept of a carry trade is actually quite easy to understand. A carry trade simply involves borrowing at lower interest rates and investing at higher interest rates, thereby earning the difference in yields. This also requires buying and selling currencies since investors will often utilize government bonds around the world. In general, carry trades are more attractive when there is a large difference in interest rates and when currencies are stable.
This chart shows the yield on a 10-year U.S. Treasury bond and the equivalent yield on a 10-year Japanese Government Bond with the shaded blue representing the spread between them. It shows that the spread has historically been large, presenting an opportunity for investors to earn strong returns through carry trades.
However, Japan has recently started to raise interest rates while at the same time here in the United States the Fed is expected to begin cutting as soon as next month. In anticipation of this spread narrowing, traders began unwinding their positions, causing a drop in Japanese and global stocks as volatility increased.
Next, this chart tracks major global currencies over the past 24 months with the value of each currency reindexed to 100 at the start of the period. As you can see, many of these currencies have experienced volatility over this period, but none more so than the Japanese yen this past week (as shown with the light blue line).
When the Bank of Japan raised rates while economic data indicated that the Fed would soon lower its rates, the relative value of the yen shot up. The carry trade, which involves borrowing in currencies from countries with low interest rates, in this case, Japan, and investing in higher yield assets unwound rapidly, sending shockwaves across global markets last week.
However, the situation has since stabilized and the yen is beginning to trend back closer to previous levels.
Finally, this chart shows stock market corrections and recoveries going back to World War II. Market corrections are defined as declines beyond 10% but no more than 20% from the most recent all-time high.
In the average correction over this period, the S&P 500 fell 14.3% from peak to trough over the course of about five months. Recoveries typically occur more quickly, taking just four months on average. Most importantly, these recoveries tend to begin when investors least expect them. At Dynamic Wealth Group one of our core philosophies is not to attempt to predict the future, but instead to prepare for the future, regardless of what may happen. We target this by following our Multi-Dimensional Asset Allocation Approach.
In light of recent technical factors driving markets, it’s crucial for investors to remember that in the long run, markets are driven by economic growth and corporate earnings. These fundamental factors tend to propel markets higher over time, despite periodic setbacks. Despite recent market swings, staying invested in a truly diversified portfolio is essential to staying on track toward financial goals.
We hope you found these high-level insights helpful. If you are a financial advisor and would like more information on our Multi-Dimensional Approach towards asset management, feel free to download our eye-opening whitepaper titled, “Busting seven risk and return myths”, click the link below or visit our website DynamicWG.com, or emailing us at: Info@DynamicWG.com. If you are an individual investor, we are happy to address any questions you may have and put you in touch with a qualified advisor if so desired. Until next time, take care everyone, and make smart, logical & fact-based financial decisions.
Disclaimer: