Keep calm and carry on, as the saying goes, and that's what money managers are espousing amid the global market turbulence of the last few days, despite a still-high volatility index reading, concerns over a U.S. recession and worries about a potential misstep by the Bank of Japan with its rate hike.
Global markets showed optimism on Aug. 6 after a disappointing U.S. jobs report, weaker than expected earnings from AI companies and worries over geopolitical turmoil sparked jitters late last week and on Aug. 5.
The S&P 500 was up about 0.4% at U.S. market open, having dropped 3% on Aug. 5. Japan’s Nikkei 225 opened with double-digit gains on Aug. 6 and was still up more than 10% as of 6.30 a.m. EST, having dropped by 12% a day earlier, according to Bloomberg.
The FTSE 100, meanwhile, was up 1.3% at U.K. market open, having lost about 2% on Aug. 5.
However, the Cboe Volatility Index or the VIX — an index that measures the market’s expectation of volatility over the next 30 days — remains at elevated levels. The VIX was hovering just over 30 early on Aug. 6, having spiked at 55 a day earlier. Prior to the release of a weak U.S. jobs report on Aug. 2, which had money managers predicting interest-rate cuts later this year and a growth slowdown, the VIX had been below 20.
“What a difference a day makes,” said Matt Britzman, senior equity analyst at Hargreaves Lansdown, in an emailed comment, adding that along with global market rebounds, U.S. futures look to be rebounding. “Investors shouldn’t assume this relative calm means markets are back to behaving rationally again: the volatility index is still at elevated levels, suggesting more turbulence to come.”
And yet, “no single piece of this puzzle warrants such a massive shift in sentiment,” Britzman added, and so “this looks to be more about a perfect storm of factors. Calmer waters should prevail and longer-term growth trends like the AI revolution remains very much intact.”
It’s important, managers said in various commentaries, to remember that sharp falls are not especially unusual in equity markets, sources said.
“There has been a violent sell-off in equities in recent days, punishing consensus and crowded trades,” said Simon Webber, head of global equities at Schroders. “However, this must be seen in the context of exceptionally strong equity markets since October 2023 and a correction is perfectly healthy and normal,” he said, citing that the MSCI ACWI was up about 32% by mid-July from lows in October.
The firm still expects equity markets to be well-supported in the medium term by modest growth in corporate earnings, with a soft landing forecast for the U.S. economy as its central scenario.
“The bottom line is that equity markets were vulnerable to a correction but company fundamentals are decent and heightened volatility is an opportunity for repositioning where dislocations occur,” Webber said.
And Kristina Hooper, chief global market strategist at Invesco, agreed in a separate commentary that “market corrections are not uncommon.”
She thinks markets are “overly worried about a U.S. recession,” maintaining that the U.S. job market is in “relatively good shape.”
Hooper added that a Federal Reserve easing starting in September will likely mean the market can avoid a recession.
First and foremost, stay calm,” she added. “We have to remember that market corrections are not uncommon. They happen in most years and don’t tend to come out of nowhere. Our tactical indicator turned defensive at the start of July as growth was below trend and slowing. We’re not surprised to see bonds rallying and stocks falling. At midyear, we said we wouldn’t be surprised to see a correction (and then a recovery) before the end of the year.”
Regarding a recession, Hooper doesn’t think risks have risen significantly.
The biggest mistake for long-term investors would be to get spooked and move out of markets, Hooper said.
"I have seen this emotional investor reaction occur in significant sell-offs over the years, including the global financial crisis, and it is perhaps the most damaging decision investors can make," he said. "Rather, I am optimistic this sell-off could represent an opportunity for those patient investors with a significant overweighting to cash to consider reducing that exposure."
And Paul Eitelman, chief investment strategist for North America at Russell Investments, agreed that long-term investors “should avoid overreacting to the sea of red headlines.” He said while the economy is slowing, last week's job report “likely exaggerated the case with headwinds from Hurricane Beryl and strong labor supply contributing to the rise in the unemployment rate.”
There are also key areas of resilience, including “healthy second-quarter earnings and a positive surprise on the (Institute for Supply Management) Services report. Importantly, with inflation no longer as material of a concern, the door is wide open for the Fed to step in and stabilize the economy as needed,” Eitelman said.
