Market volatility has returned, and we are monitoring events closely. Jitters have been driven by a confluence of events (fears of a Fed policy mistake & renewed recession worries chief among them) and exacerbated by the interconnectedness of global capital markets. A primary culprit for the sloppiness of recent price action appears to be the collapse of the so-called ‘yen carry trade’ and the corresponding forced unwind of levered, speculative bets in heavily crowded positions.
Markets are moving fast but our disciplined process helps prevent us from being led astray by short-term volatility. Small caps rallied over 15% in July - led by the junkiest names – only to give it all back in just a handful of trading days in August. We are earnings focused and the fundamentals of large US growth stocks remain solid absolutely and relative to alternatives. Despite mixed headlines, Q2 earnings results have been mostly encouraging thus far, and we note that AI capex spend is at full-throttle, slowed by capacity only.
Credit spreads finally widened but remain tight and long-duration US treasuries are rallying, returning to their traditional role as a source of resilience amidst anxious markets. We note too that the US dollar is *not* rallying, suggesting something other than a “the world is truly ending” panic. This appears consistent with any ordinary ‘growth scare’ but non-recessionary-driven equity correction, particularly given the context of such a hot start to the year. As the earnings, inflation, and unemployment picture continues to evolve, we remain ready and willing to adjust the portfolio, as necessary.
Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. It is not possible to invest directly in an index. Source: Bloomberg, as of 8/5/2024. Chart shows the Russell 2000 Index and the GS Most Short Rolling Basket, which consists of the top 50 stocks in the Russell 3000 with market caps greater than $1B that have the highest percentage of short interest as measured by float. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.
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