Leeward Investment Team

Given the recent market volatility that began late last week, we wanted to write you a quick update note.

Markets have been unexpectedly under pressure over the last few days during what has normally been a quiet period of the year. Multiple factors have contributed to this situation, including strong year-to-date returns, high investor expectations, mixed 2Q earnings, and weakening economic data.

Over the weekend, we saw a ‘pair trade’ unwinding in the Asian currency markets. Under this type of trade, investors had been shorting (selling) the Japanese yen and using the proceeds to buy U.S. dollars and U.S. equities. With U.S. markets down last Thursday and Friday, the USD/JPY pair trade imploded, forcing investors to close their positions and pushing Asian markets down dramatically yesterday. The Nikkei was down over 12%.

This morning, we saw the ripple effect in U.S. markets, with the Dow, S&P 500, and Nasdaq all down substantially on market open at 6:30 a.m. Volatility was also up, with the VIX (a standard measure of market movement) trading near multi-year highs. The downward pressure started to subside mid-morning as investors with Asian market exposure cleaned up their positions. Trading volume has begun to ease, volatility has dropped sharply, and markets have started to recover.

While we don’t anticipate an immediate market rebound, we foresee portfolios maintaining their value in the short term before potentially growing later in the year. The most recent employment and manufacturing data have been slightly weaker than expected, and the Federal Reserve Bank's rate cut plans for the next six months are still uncertain. However, once the rate cuts are announced and we see stronger economic data later in the year, we expect a return to positive momentum.

We are reviewing positions and will adjust as opportunities arise. In general, we do not view the current environment as calling for a heavy defensive posture. Economists call the current environment a ‘mid-cycle slowdown,' when earnings growth slows. Market returns are usually positive during mid-cycle periods, which is much different from the recession we experienced during the pandemic.  

We hope you are enjoying a wonderful summer.  Please feel free to reach out with any questions.

Sincerely,

Jim and Mike

jim@leewardfp.com

mike@leewardfp.com