Evaluating Risk & Return

Introduction

The financial world was shaken on August 5, 2024, when global stock markets experienced a significant crash. The abrupt downturn was triggered by a confluence of events – a surprise monetary policy shift in Japan coupled with growing fears about a slowing U.S. economy culminated in mounting concerns over a potential global recession. In this month’s newsletter we unpack these critical developments and offer insight into what led to this market upheaval and what the broader implications are for you.

Japan's Rate Hike: The Catalyst

The first domino to fall was Japan's unexpected decision to raise interest rates by 15 basis points, setting the new rate at 0.25%. As this move was a departure from the Bank of Japan’s traditionally low-rate policy, investors were caught off guard.

The sudden rate hike sent shockwaves throughout the global financial system as the Japanese yen appreciated sharply causing the popular Yen Carry Trade to unwind. This strategy, where investors borrow yen at low-interest rates to invest in higher-yielding assets abroad, not only became unprofitable suddenly, but also prompted a massive stock sell-off across global markets.

Fears of a Slowing U.S. Economy

Simultaneously, investors have been growing increasingly anxious about the health of the U.S. economy. The particularly weak Jobs Report, released July 26, 2024, by the U.S. Labor Department revealed that non-farm payrolls grew by just 114,000 jobs, a number significantly below the expected growth of 200,000 jobs. The unemployment rate also increased by 0.2 percent to a concerning 4.3%.

Painting a bleak picture of the U.S. economic outlook, the data stoked fears of an impending recession. As these concerns took root, market sentiment soured, leading to a widespread sell-off across all major indices.

Mounting Global Recession Fears

The final piece of the puzzle is the rising fear of a global recession. The combination of Japan's rate hike, a slowing U.S. economy, and ongoing economic struggles in other major markets is creating a perfect storm.

In Europe, economic growth has been stagnating, with Germany narrowly avoiding a recession in the second quarter of 2024. Additionally, the Eurozone continues to grapple with persistently high inflation, exacerbated by energy price shocks. France and Switzerland are also seeing significant economic challenges, with both reduced consumer spending and declining industrial output.

Meanwhile, China's economy is facing significant headwinds as its property market crisis deepens. With major developers defaulting on debt, there has been a great reduction in consumer confidence as well as sluggish industrial production.

Market Impact: A Day of Heavy Losses

On August 5, 2024, global stock markets faced severe losses on a day of widespread financial turmoil. In the United States, the S&P 500 declined a significant 2.6%, one of its sharpest single day drops of the year.

Meanwhile, Brazil's Bovespa plummeted by 14.0%, reflecting deep concerns over the country's economic stability. Japan's Nikkei 225 marked one of its worst performances in recent history with a devastating drop of 12.0%.

Turkey's BIST 100 fell by 11.0% as the nation grappled with inflation and political instability. At the same time, South Korea's Kospi tumbled by 8.9%, triggering a rare 20-minute trading halt due to this rapid decline.

The impact was equally severe in Europe. Switzerland's SMI dropped by 4.7%, and France's CAC 40 fell by 4.3%, causing serious concerns over the Eurozone's economic health. The FTSE 100 in the UK decreased by 3.2%, while Germany's DAX declined by 2.9%, both of which indicate widespread investor anxiety across the continent.

The cryptocurrency market also suffered when Bitcoin lost 5.0% of its value as investors fled to safer assets amidst the global sell-off.

This day of heavy losses highlights the interconnectedness of global markets and the rapid spread of financial contagion in times of uncertainty. See details in the chart “Individual Market Drops Around the World” below.

Continued Market Uncertainty

Market uncertainty has continued to loom large in the wake of the sudden August 5th drop. The VIX (Volatility Index), commonly referred to as the "fear gauge," surged from around 23 in late July to over 65 on August 5th, before settling back to 15 on August 15th. The spike marked the highest level of volatility since the market disruptions of 2020. The elevated VIX indicates that market participants are increasingly anxious and are bracing for continued turbulence since economic data and policy decisions continue to be unpredictable.

What Does it Mean for Investors?

The recent stock market crash on August 5, 2024, has underscored the volatility inherent in global markets, particularly those heavily reliant on specific sectors.

As investors grapple with these fluctuations, first trust deed lending provides a compelling alternative because it offers stability in uncertain times. Unlike the stock market where values can plummet overnight, low loan-to-value first trust deed lending provides a conservative alternative to stocks, bonds, and mutual funds. This strategy allows for consistent returns removed from stock market turmoil, making it an attractive option in today's volatile environment.

Safeguard’s competitive rates start at 10%. Choosing to be a first trustee lender over traditional stock market investments means more stable and predictable cash flows. This is especially true in a high-interest environment where borrowers compete and lenders win.

With over 20 years of experience, our team at Safeguard is committed to helping you navigate these turbulent times. To see available first trust deed lending options, you are welcome to fill out this form, reply to this email, or call us at 877-280-577