Market Volatility Returns

Monday saw one of the largest market selloffs in quite some time.  However, by the end of the week, the markets had recovered virtually all of the decline and looked likely to finish the week only slightly lower.  This points to the heightened volatility I have mentioned in recent weeks and highlights the current uncertainty.  While it is now clear that the Federal Reserve (Fed) will cut interest rates at its September meeting, it remains to be seen if the current downtrend in economic data will accelerate, or instead decline slowly allowing the Fed time to begin easing monetary policy in a well-communicated and disciplined manner.  For now, we remain in the “soft landing” camp.  Let’s hope the market reaction this week was just an aberration.

We’ve become accustomed to a lack of volatility in the markets since October 2022.  Volatility has declined substantially over that time with the occasional blip here and there.  However, we experienced on Monday the return of volatility in epic proportions.  While I don’t anticipate many days like Monday, we should recognize that the last twenty months are the anomaly, not this past Monday.

There are some issues with the economy and a lot of unknowns.  From geopolitical risks to political angst, and worsening job prospects to stagnant inflation, there are many reasons for the markets to be worried.  While you may be worried, we should recognize that these periods are transitory and if your time horizon is measured in years not months, we will navigate our way through it all and hopefully not lose too much sleep in the process.

One thing the Fed cannot do is alarm the markets.  This week esteemed professor Jeremy Siegel, of the Wharton School of Business, urgently pressed the Fed to make an emergency rate cut of 75 basis points (0.75%) before its next meeting in September.  While the sound bite is compelling, he should know better.  Investors look to the Fed to telegraph its intentions well in advance of it making rate cuts or hikes.  This has been the norm ever since Alan Greenspan started the practice over thirty-five years ago.  To suddenly change course would be to create more volatility and bigger swings in volatility than anyone wants.  From a historical perspective, the Fed has had an emergency rate cut nine times in the last thirty years.  The evidence in each of these nine cases suggests an emergency rate cut only comes amidst a true emergency in the economy or financial markets: global pandemics (COVID - 2020), the bursting of asset price bubbles (the tech bubble - 2000 and Black Monday - 1987), systemic events with sizeable spillovers (the great financial crisis - 2008, Long Term Capital Management (LTMC) - 1998, the Russian financial crisis - 1998), and acts of war (the attacks on 9/11 - 2001).  And if that isn’t enough, the September FOMC meeting is less than forty days away. Be patient, rate cuts are coming.

In company news, I want to relay a story about one company’s strategic blunder that had me thinking of another company.  This week we learned that Intel passed on investing in OpenAI back in 2017.  OpenAI is currently the leader in artificial intelligence quickly being proposed for human interfaces.  Intel, then led by Chief Executive Bob Swan, decided against the investment in part because Swan did not think generative AI models would come to market in the near term.  Boy was he wrong.  AI is now the fastest-growing part of the technology sector and propelling revenue and earnings growth well into the double digits.  The other company that this brought to mind was Eastman Kodak.  You probably know the company for the film it produces for film cameras.  But did you know Kodak invented the digital camera in 1975 before deciding to shelve the project? It turns out that Kodak’s leadership rejected the digital camera, fearing it would cannibalize existing business.  As the inventor later told the New York Times, “It was filmless photography, so management’s reaction was, ‘That’s cute – but don’t tell anyone about it.”  Embracing innovation can sometimes be difficult or so it seems.

In closing, you may also be watching the Olympics as I have for the past two weeks.  From time to time, NBC cuts to an interview with Snoop Dogg, the American rapper and record producer.  He’s been intertwined with this summer Olympics from being seen in the stands, to carrying the Olympic torch, to taking swim lessons from Michael Phelps and dressage lessons with Martha Stewart.  It turns out, he is on contract with NBC to the tune of $500,000 per day plus expenses to help cover the Olympics.  One analyst guestimates that Snoop Dogg will receive upward of $15 million for his quirky take on the games.  If you have wondered about his special place in the programming, now you know. 

Bruce J. Mason, MBA