TOP STORY
🚨 Why Markets Crashed This Week… and Then Rebounded

🤯 On Monday global markets were hit HARD…

• 🇺🇸 The S&P 500 was down 3%

• 🤖 The NASDAQ was down 3.4%

• 🇯🇵 Japenese markets (Nikkei 225) crashed 12.4% for it’s worst day since 1987

• 🎢 The VIX index, a measure of fear and volitility in the markets, hit it’s 3rd highest level ever (next up to only the 2008 Financial crisis and the start of the COVID-19 pandemic)

🤷‍♂️ But despite all the panic, the markets closed off the week more or less where they started, with the S&P only down -0.04%, after the best two-day run of 2024.

🧐 So let’s investigate what happened and some lessons we can learn from this wild week.

🇯🇵 Japanese ‘Yen Carry Trade’ Sparks a Crash After Bank of Japan Raises Interest Rates

🤔 One of the biggest triggers of the market crash on Monday was the Japanese ‘Carry Trade’. Now if you’re thinking ‘what the heck is that’, you’re not alone. Here’s a quick summary:

• 💴 Japan’s Yen has had a rapidly declining exchange rate with the US dollar (down 10% since July 10) making it more expensive for Japanese to buy US goods and raising energy costs

• 💡 Unlike the US, which has interest rates at 5.5%, Japan still had interest rates of 0%-0.1%

• 🤑 This resulted in the ‘Yen Carry Trade,’ a tactic where traders would borrow from Japan and invest in the US market

• 😬 On Wednesday the Bank of Japan unexpectedly annouced that it was raising interest rates to 0.25% (it’s highest level since 2008) and implied further rate increases were on the horizon to combat inflation and the falling exchange rate

• 😱 This drove the ‘carry traders’ to try and get out all at once, causing mass selling, panic, and a market crash

🇺🇸 US Fed Rate Decision and Job Report

😰 Panic from the carry trade sell-off wasn’t the only factor at play, fear was amplified by the US Federal Reserves’ decision not to cut interest rates, and a dismal job report showing rising unemployement. 

🏦 The Fed Holds Interest Rates at 5.5%

• Last Wednesday the Fed kept interest rates steady, remaining at a 23-year high

• High interest rates tend to hurt economic activity as they raise borrowing costs and discourage spending (for both companies and individuals)

👷‍♀️ Unemployement higher than expected, raising fears of a recession

• A jobs report on Wednesday showed that unemployement had risen to 4.3%, it’s highest level since 2021 (compared to 4.1% expected)

• This caused panic as it triggered the ‘Sahm Rule’ - a economic rule which states that if the unemployment rate rises more than 0.5% within a one year period the US is in a recession.

🤖 All this added to an already beaten down market after big tech earnings last week (read my summary here), with Bloomberg saying Big Tech is “failing to convince Wall Street that AI is paying off.”

😎 Before we dive into how the market managed to recover from this wild crash (and a few lessons we can learn), let’s take a quick break to hear from this week’s sponsor Webull Canada.

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TOP STORY CONTINUED
📈 The Recovery: How the Markets Bounced Back from the Crash

🤷‍♂️ Despite many calls that the sky was falling and the good times were over, the market ended the week in pretty good shape with the S&P 500 basically exactly the same as where it ended last Friday.

Here are a few factors that drove the recovery:

• 🇯🇵 The Bank of Japan said on Wednesday it will not hike interest rates while markets are unstable, reducing fears of further rate hikes

• 👷‍♀️ New data on Thursday showed the labour market wasn’t in as rough shape as originally thought, with first-time unemployment benefit claims falling 7% from the previous week

• 💸 Many beleive the heightened volatility increases the likelihood the Fed will decrease rates in September

😱 Markets Remain in a State of Extreme Fear

😰 Despite the rebound, investors continue to be in a state of ‘extreme fear.’

🔥 Even so, the turnaround has led many investors and analysts to beleive a recession may still be avoided.

👀 All eyes will be on Wednesday’s Consumer Price Index Report, Home Depot and Walmart earnings, and of course the Fed’s policy decision in September as a gauge of whether a recession is still around the corner.

💡 Lessons Learned

This week certainly tested our mettle as long-term investors, and hopefully taught us a few lessons. Here are three I think everyone should walk away with:

🚨 Don’t panic sell

• As a long-term investor, you should remember that it is extremely difficult to time the market and you’re in this for the long-haul. You’ve done your research and purchased companies or ETFs you beleive in. You know they might go up and down in the short term, but you’re in this for the long-haul baby so who cares 🤷‍♂️ 🔥

📊 The importance of diversification

• When times are good an over-allocation to one sector may seem like a good thing (cough cough tech 😮‍💨), but over-exposure can leave you at much higher risk during a downturn. A market ‘crash’ like this can be a good test of whether the risk-profile of your portfolio is appropriate for you. If the Monday/Tuesday losses would have been devestating for you, it might be a sign that you’ve exposed yourself to too much risk in your portfolio, or your asset-mix doesn’t appropriately match your time horizon (i.e. saving for a home purchase in 1 year vs retirement in 25+ years) 🏡 👵

🔍 Don’t forget to zoom out

• It’s easy to get caught up in the headlines, but just remember, they’re designed to make you click (often through panic and fear). Even after the Monday ‘crash’, the S&P 500 was still up 16% over the past year (much higher than the 1-year average). Again, if you’re investing from the long-term, you should expect a few market downturns and many many many doom and gloom headlines along the way 🎢 🚨

💡 These are just a few of my lessons, but definetely make sure to check out some of the amazing posts from the Blossom community with more incredible insights and learnings!

FROM THE BLOSSOM COMMUNITY
🎙️ Top Discussions this Week

👇 Click to see the full post!

A QUICK WORD
🥳 Blossom Superchat Has Arrived!

🌟 In case you missed my email on Thursday, we just launched a huge update to the app, adding direct messaging to Blossom!

🤑 We’ve spent months designing and building the ultimate chat for investors where you can tag stocks, share charts, trades, daily performance summaries, and more. I can’t wait for you to try it out!

🐝 As a thank you for reading all the way to the end, the first 5 people who DM me ‘BUZZ’ on Blossom via the Investing Superchat, I’ll send you a $10 Starbucks gift card 😎 ☕️

Thanks again for being part of the Blossom community!

-Max, CEO of Blossom

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