Asia Tea Time - Cup 65 ☕
This week I talk massive stock market falls worldwide and why keeping calm in times of widespread fear will help us meet those long-term financial goals.
Macro in Asia
Japan stocks plunge on fears of a potential recession in the US
Japan’s stock market saw its biggest one-day fall since 1987. The Nikkei 225 Index cratered by 12.4% on Monday (5 August) as fears rose that the US – the world’s biggest economy – was going to enter a recession.
That marked the Nikkei’s single biggest day percentage fall in nearly 40 years but Japanese stocks saw a rebound later in the week as investors’ fears receded.
Why it’s happening
- Monthly job numbers for the US came out in the US on Friday (2 August) and the market didn’t like it as the economy only added 114,000 jobs in July, versus expectations of 175,000.
- This combined with the a strengthening Japanese yen, which had appreciated for three weeks straight against the US dollar and was also boosted further by a surprise interest rate hike by the Bank of Japan (BOJ) on 31 July.
- The upshot of all this volatility and market plunges was the “carry trade”. Basically borrowing money in a low-yielding currency (the Yen) and buying higher-yielding/appreciating assets – think US tech stocks.
Why it matters
- The US stock market is the world’s largest while Japan’s is the third-largest so moves in these two economies basically impact everybody.
- With interest rates in the US looking likely to fall in the coming months (as inflation falls and the job market cools), and rates in Japan looking like they will continue rising, the volatility could continue hitting Asian markets.
What’s next?
- Watch out for September’s US Fed meeting, where the market expects at least a 0.25% rate cut while investors should also monitor the strength of the Japanese Yen and where the BOJ is heading with its rate path.
Tim’s Take
It was a pretty tumultuous week for investors of stocks, not just in Japan but worldwide.
Taiwan stocks also got hit, falling by over 8% and the declines were lead by its chip giant TSMC.
Where do investors go from here? While the Nikkei 225 had its worst points fall ever, it did rebound over 10% on Tuesday (6 August) and actually finished the week down just over 2.5%. That’s not super dramatic.
Fear is in the air and that’s normal given we’ve had a relatively “smooth” upwards trend in both Japanese and US stocks so far in 2024.
That peaceful ascent was shattered dramatically – as it normally is in markets when fear takes hold – but the attribution of the “Yen carry trade” still probably has someway to go.
Indeed, this past week, JPMorgan estimated that the “unwind” of this trade is probably only 50-60% complete.
So, while nothing has fundamentally changed with the US economy (bar one poorer-than-expected jobs report), markets have been hit.
Yet none of us should be surprised to see more volatility, and perhaps further sell-offs, as fear rises on whether the US economy will enter a recession.
And remember, we also have a US presidential election in November so investors should prepare for a bumpy ride.
Tim's money tip of the week
The last week in global stock markets has delivered excitement (but more likely mass fear) for investors.
None of us like to see our investment portfolio plunge by 5-10% in one day but we have to remember that this can happen from time to time and is completely normal. At least from a historical context.
We can’t (and shouldn’t) expect markets to keep moving up in a straight line forever. As long-term investors, the best mindset to get into when stock markets freak out and sell off is to think “I can buy stocks at a cheaper price”.
As Warren Buffett once famously said: “The stock market is the only place where people head for the exits when there’s a massive sale on.”
By taking on this mentality of not letting emotions direct our investing decisions, as well as sticking to our long-term financial plan, we can better meet our goals in future.
Remember, this one incident could be repeated a number of times over the next few years. No one knows. But what we do know is that global stocks – on average – give us compounded returns of 7-8% each year.
For those of us thinking long term, knowing that should provide some comfort in times like these.
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