CAMBRIDGE – To the extent that financial historians ever refer back to August 2024, I suspect it will be for the craziness of the first three days of the month, when equity prices tumbled as investors’ dumped their darling stocks and sent the VIX (Wall Street’s “fear index”) soaring to levels not seen since the start of the COVID-19 pandemic in 2020. All this disorder will likely be attributed to the “bad technicals” associated with an over-leveraged Japanese yen “carry trade” and junior, inexperienced traders whose superiors were away on summer holidays.
But while the volatility was indeed eye-popping, it did not take long for the damage to be reversed. By the end of August, stocks had more than fully recovered, the VIX was back at its normal levels, and there were indications of traders piling back into the carry trade (borrowing in a low-interest currency to invest in higher-yielding assets elsewhere). Moreover, this recovery was validated and reinforced by US Federal Reserve Chair Jerome Powell’s dovish speech at the Jackson Hole Economic Symposium, where he declared that “the time has come for policy to adjust,” “the direction of travel is clear,” and the Fed does “not seek or welcome further cooling in labor-market conditions.”
As much as these widely covered developments interested me, I will remember August 2024 for different reasons, because I was most struck by the volatility of two other major influences on investors: Wall Street economists’ consensus view of the economy, and their views relating to the Fed’s policy prospects. Here, too, we saw enormous instability, for which junior employees cannot be blamed.
For example, one seasoned, highly respected leader of a strong team of economists at a major Wall Street firm decided, in early August, to increase his group’s recession probability from 15% to 25%. And this dramatic change came just four days after the firm had welcomed Powell’s soothing remarks at the conclusion of the July 30-31 Federal Open Market Committee policy meeting. Equally unusual, the call was partly reversed two weeks later as the firm’s economists lowered their recession probability to 20%, a decision based on a single reading of an inherently volatile weekly data series.
Read more here.
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out our podcasts.
