August has begun with a strong selloff in global stock markets. What’s going on, and what should you do?

Before we start: financial markets change all the time, reacting to events as they unfold.  This short briefing note represents Moneycube’s views as at 1000 on Tuesday 6 August and has not been updated since.

What’s happened so far?

In short, we have seen a rapid sell-off in stock markets over the last couple of days, followed by a partial recovery starting yesterday in US markets.

In particular, the main Japanese index had its biggest fall since 1987 (before rising 10.2% today), while the US Nasdaq, which is dominated by the big technology companies that have driven market growth for a year or more, has entered “correction” territory, falling more than 10% over the last month (before rebounding partially). Some European markets closed down more than 2%. Later on Monday, US central bankers made statements that calmed markets and led to significant recoveries in share values.

Why are markets falling?

Several factors have combined to change the mood for investors at the start of August. Here are the main ones:

1. Negative US economic data

Weak payroll, unemployment and manufacturing data all came from the US last week.  US manufacturing output fell to an eight-month low, increasing worries that the US could enter a recession.

2. Japan unexpectedly raised interest rates – and the US didn’t cut

On Wednesday 31 July, the Japanese central bank raised interest rates for only the second time since 2007. Five days later, that looks an excessively optimistic decision. Some investors who borrow in yen to invest in other currencies are now under pressure and that’s likely to be increasing volatility in markets.

At the same time, the US held rates steady, where some expected a cut.  That cut will now likely come in September – with several more to follow before the year is out, providing support to markets.

3. Berkshire Hathaway sells Apple

On Saturday, it was revealed that Warren Buffett’s Berkshire Hathaway sold nearly half its stake in Apple during Q2. Now, it still held around $85 billion worth of the consumer technology company at the end of June, signalling continued confidence in the world’s biggest company. But Buffett’s actions influence others – and are a major reason the stock fell 4.8% yesterday.

4. Politics is playing a part

Heightened risk of escalating conflict in the middle east in the wake of the killing of Hamas leadership last week, as well as Saudi Arabia’s decision to raise oil prices is affecting the energy market, and heightening volatility more generally.

5. Markets have had a strong run in the first half

Benign economic conditions and excitement around artificial intelligence have driven strong gains in the first half of the year, as we discussed recently here. On top of that, it’s August, with many traders away from their desks, and that can prompt markets to move more dramatically, as there is less liquidity overall.

Moneycube still believes the conditions are in place for strong gains in 2024. The journey will be less smooth, but falling inflation, interest rate cuts and strong corporate earnings remain a positive combination for investors in risk assets.

What should you do?

It’s vital to put market movements over the last few days in context.

Remember gains to date – and the ground that’s been recovered

Almost all assets now selling off are those which have experienced a strong run so far this year. The AI chipmaker Nvidia, for example, has more than doubled its share price this year – even after the recent pullback.  If you’ve been invested for more than a few weeks, you’re almost certainly sitting on gains. And if you stayed in over the last 24 hours, you’ve benefitted from a rapid recovery of much of the lost ground.

Ups and downs are normal in financial markets

Volatility is part and parcel of investing your money – in fact, it’s the price you pay for getting a long-term return on your money in excess of bank interest rates. It’s not pleasant – but recognising that it is normal can help you tolerate it in your portfolio.

In fact, it’s likely there will be continued volatility in the coming days, as further trades unwind and markets make sense of what has happened since the start of the month. But given economic activity levels and central bank actions to address markets’ real concerns, this looks to be within normal bounds.

Balanced portfolios will weather this storm

Gold, bonds, and many other assets are experiencing price increases as money seeks safe haven assets. If your portfolio is with Moneycube, you’ll be invested in a broad range of assets, spread among different industries, geographies, and asset classes.

If you’re still in doubt, have a read of one of our classic articles on what to do during market turbulence.