Nutmeg investor update: September 2024

In this update, we cover how August was both a typical, quiet, summer month, as well as one of the most exceptional Augusts we've seen in a long time. Secondly, we review why an off-the-radar town in the US became the centre of the financial world.

Financial markets in August got a lot of media attention, but things seem normal now - can you explain?

If you were lucky enough to disconnect and relax by the beach this August, or were caught up in the spectacle of the Paris Olympics, you would be forgiven for thinking that nothing major happened this month.

The FTSE 100, the UK's main market for large equities, ended the month up 0.9%. In the US, the Nasdaq gained 1.2%, while the S&P 500 was up by a respectable 2.4%. Similarly in the bond market, British gilts were moderately up and many major risky asset classes had low positive returns.

Of course that's how the story ended, but some markets had an extremely volatile journey to get there. The largest movements were in equities between the 1st and 6th of August - a very short period for a market correction.

Japan's main equity index, the Nikkei, was at the centre of these corrections. Within three days, the Nikkei lost 20%, culminating with a loss of over 12% on Monday the 5th - the largest daily loss since Black Monday almost 40 years ago. Other markets were impacted, though to a smaller magnitude. The Nasdaq lost around 8% between the 1st and the 6th of August, and the FTSE index around 6% over the same period. The lesser known VIX index, which is used to measure fear and uncertainty in US equity markets, had its second largest same-day percentage increase since the index began in 1990. This meant a short and sharp increase in expectations of future volatility, before experiencing its second largest decrease in percentage terms the very next day.

So what's behind these dramatic movements?

Explanations aren’t always clear-cut, but we want to differentiate the short-term triggers from the longer-term roots.

In the short-term, a few events around that period stand out as potential causes. First was the US Federal Reserve's press conference on July 31st which outlined lingering inflation, but an improving job market, followed on August 2nd by a relatively poor job report. This sparked fears that the US economy could be in worse shape than previously anticipated. The second factor was the Bank of Japan's largely anticipated policy rate increase to 0.25%, the highest rate in almost 16 years. Then, over the weekend of the 3rd and 4th - Warren Buffett's US conglomerate, Berkshire Hathaway, announced it had reduced its position in Apple - creating headlines that technology stocks were potentially over-valued. 

However, we believe the major cause was one we have been watching for some time, the so called yen carry trade. While many major currencies, including the US dollar, euro and British pound, saw rate increases in the last 3 years, the Japanese yen was an exception. Many investors were therefore borrowing in Japanese yen at a very cheap rate of around 0%, and buying other assets, especially in the US, which could earn around 5%.

Think of this like an elastic band - if you stretch it wider, slowly, the snap-back can still be brutal. This is exactly what happened with the short-term macroeconomic news triggering a sharp reversal, and investors selling assets to reimburse their yen borrowings. Such events are hard to predict, and what's fascinating in this case is how quickly things returned to business as usual afterwards. 

Did you change Nutmeg portfolios during this unusual period?

Well we were not lying on the beach this month, fortunately, because the market correction was a great opportunity to enter a number of markets. We increased our equity positioning, as prices had drifted lower during the sell-off. This included the Nasdaq in our actively managed portfolios. We also rebalanced our fixed income allocation, taking a small profit for our clients. It was positive to benefit from this volatility, especially given how quickly things normalised. At the end of August, we increased our allocation to UK small cap stocks, which we think is currently benefitting from a more stable political and economic landscape versus other regions.

What happened at the Jackson Hole Symposium and why does it matter?

Every August since 1981, Jackson Hole, Wyoming, becomes the centre of the financial world as it plays host to the Jackson Hole Economic Symposium, a gathering of central bankers. This year's was particularly special as Jerome Powell, the Chair of the US Federal Reserve, confirmed that the Fed will start its rate cutting cycle. While it's still unclear by how much and how fast, this indicates the fight against inflation could be behind us for now, both in the US and more globally. This is a positive step for fixed income assets and equities in the long-term, which we'll discuss further next month.  

Thanks for watching. If you have any questions or suggestions for a topic you’d like us to discuss in next month’s investor update, you can contact us via social media, email or in the comments section below this video. 

The Nutmeg investor update is also available as a podcast. Listen to this month's update below. 

About this update: This update was recorded on 3rd September 2024. All figures, unless otherwise stated, relate to the month of August 2024. Source for figures: MacroBond, Nutmeg and Bloomberg.

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past performance and forecasts are not reliable indicators of future performance. We do not provide investment advice in this article. Always do your own research.