When Things Went Bump in the Night…
In last month's HVP Risk Dashboard we featured a chart of the VIX, which is an index that measures volatility in the equity market. Some liken it to a sentiment or "fear gauge." We like to look at long term averages and that's why we calculate the average monthly level of the VIX over the past 20 years to give us an idea if things are looking "normal" for a given month. Last month we wrote:
"Looking at the world and markets around us, higher levels of volatility do not seem to be an unreasonable possibility for the balance of 2024."
About 2 weeks later, the VIX rocketed up past 60 on an intraday basis, from a level in the teens to low twenties. While the intuition was right in this instance, we have the humility to recognize that it is very difficult to know from where that volatility spike would come.
It is always a constellation of factors in markets, but the proximate cause in early August's price action seems to have been the rapid strengthening of the Japanese Yen in currency markets. Indeed, a strengthening of the Yen, which we viewed as undervalued, helped to underpin the investment case for our Japanese holdings in both Hudson Explorer and Hudson Discovery. We will admit, however, to have been just as surprised as everyone else of the speed at which the revaluation versus the US Dollar happened. Or that we would wake up (perhaps a little earlier than usual) to find Japanese markets off 12% one day. But the story of Japanese stocks in August of 2024 is not one of despair; the fundamentals of corporate governance reform, cheap valuations, and a drive to improve shareholder returns are all continuing apace. Indeed, just as quickly as Japanese stocks declined, they have nearly fully recovered to where they started the month, and some have even gone on to make new highs.
On August 23rd, Federal Reserve Chair Jerome Powell gave his much-awaited speech at the Kansas City Federal Reserve event in Jackson Hole, Wyoming. In that speech he defended his record on monetary policy and interpretation of pandemic driven distortions. In prior speeches at this event, he spoke of the "pain" higher interest rates would cause and compared the central bank's task to "navigating by the stars under cloudy skies". This time Powell admitted his misadventure on the "good ship Transitory" - a reference to the Fed viewpoint that inflation coincident with the pandemic was a temporary supply distortion. Comparatively few words in the speech were spent on the impact of demand via stimulus spending, helicopter money, wars, continued deficit spending, or the dollars allocated - but not yet out the door - for the CHIPS and IRA spending packages. While stocks are up and bond yields down as September’s and further rate cuts are increasingly priced in, there will be no shortage of headlines this fall. With Q2 2024 earnings season nearly wrapped up, we were heartened to see strength not just in the mega-cap tech names, but across numerous sectors.
Video
On August 21st, HVP's Christopher P. Davis talked about 3 holdings with Oliver Renick on the Schwab Network's Market on Close show. He was live from our Morristown office, and in the 6-minute clip you can hear him make the cases for Deere & Co. (DE), Franco-Nevada (FNV), and Corning (GLW).