PORTFOLIO STRATEGY

This Year’s Hot Trades Are Cooling Down Due to Slowing US Growth and the Bank of Japan

Global markets just discovered what Teahupo’o surfers have always known: even the most exhilarating ride can end in an unforgiving crash. After months of gains, a shake-up was inevitable to rouse the bulls from their stupor. The signs were clear, with the Cboe Volatility Index ($VIX) surging over 40% on Friday. And now, investors are seeing what insiders had been preparing for.

Market breakdown: The Bank of Japan’s 0.25% interest rate hike disrupted one of the year’s most popular trades — the carry trade. Sophisticated investors have borrowed Japanese Yen at near-zero interest rates and invested in higher-yield assets, profiting from the asset’s decline. As a result, Asian countries had some of the bleakest showings they’ve seen in years — with Japan booking its worst trading day since 1987 and South Korea’s KOSPI exchange briefly halting trades. The impact was global, affecting risk assets from stocks to crypto.

• The Vanguard Total World Stock Index Fund ETF ($VT) fell 2.5% yesterday, led lower after global stocks followed the overseas downturn.

• Crypto markets had their worst day since 2022, with over $500B lost in market cap over the weekend. Bitcoin and Ethereum dropped below $50K and $2.4K, respectively.

Going Out of Style

The carry trade is hardly the only trade attracting scrutiny. In the US, an unexpected increase in unemployment has stoked fears about slowing US growth, leading investors to pull back from some of 2023’s most crowded trades — including Big Tech names, semiconductors, and growth stocks.

• After earnings from Magnificent Seven darlings such as Nvidia ($NVDA) and Tesla ($TSLA) failed to impress, the tech-heavy Nasdaq-100’s fell within earshot of correction territory on Monday.

• The growth-focused Russell 2000 ($IWM) lost most of its year-to-date gains, and the red-hot VanEck Semiconductor ETF ($SMH) decreased 11% week-over-week.

Did the Fed wait too long? Stocks originally rallied on optimism that the Federal Reserve would begin cutting interest rates before things went awry. Now, Fed officials are clarifying that if economic troubles emerge, they will step in to “fix it.” This has drummed up a discourse about whether the Fed waited too long to end its generational rate hike cycle and start reducing rates.

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LARGECAP RECAP

📒 Accountant Shortage Wreaks Havoc On Publicly-Traded Companies, Threatens Financial Statements and CFO Stability

Think getting your taxes done is a headache? Ask a CFO how they feel. Over 300K accountants and auditors have retired or left their jobs in the past two years, leading to a 17% decline in industry employment in the US. This shortage is impacting the quality of publicly-traded companies’ earnings reports.

• In 2023, 720 businesses cited insufficient accounting staff as a factor in errors, a 30% jump from 2019.

• According to the WSJ, these kinds of deficiencies generally increase the odds that a company’s CFO is replaced — which means turnover in this critical position could become more common.

=SUM(ERROR): Businesses and accounting firms can’t fill open jobs fast enough, as fewer college students enter accounting careers due to long hours and poor pay. Since the 2008 Financial Crisis, new grads in accounting have faced stagnant salaries despite rising education costs. To address these issues, trade groups such as the National Pipeline Advisory Group have proposed alternative certification options for the Certified Public Accountant (CPA) license, but no changes have been made yet. This means investors may have to endure accounting uncertainty for the foreseeable future.

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Markets & Economy

Buffett slashes Apple stake: Berkshire Hathaway cut its Apple position by nearly half in Q2, now holding $84B. Wall Street analysts suggest not overreacting, emphasizing Apple’s concrete fundamentals and growth prospects. [Read]

Cloud leaders ramp up AI infrastructure: Big Tech is rapidly expanding its AI cloud infrastructure to meet surging demand. The companies are investing heavily in GPUs from Nvidia and AMD ($AMD), with global AI infrastructure spending projected to hit $1T by 2028. [Read]

Medicare scrutinizes home health visits: The Centers for Medicare and Medicaid Services is investigating potential abuse of a program that pays insurers extra for diagnosing health conditions during home visits. The agency spent an estimated $15B on the program from 2019 to 2021 and wants to curb inflated payments. [Read]

Business & Wealth

Google loses antitrust case: In a landmark win, Judge Amit Mehta ruled that “Google is a monopolist, and it has acted as one to maintain its monopoly.” Here’s what comes next for the search giant… [Read]

Student credit cards face stricter rules: The Consumer Financial Protection Bureau proposes tighter regulations for issuing credit cards to those under 21, requiring proof of independent income or assets to prevent excessive debt. [Read]

Snoop Dogg boosts Olympics viewership: The rapper’s involvement in Paris Olympics coverage has significantly increased audience engagement. Viewership is up 79% compared to Tokyo, with the opening ceremony attracting ~29M viewers. Snoop’s unique commentary has gone viral on social media. [Read]

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DIGIT OF THE DAY

Shoplifting Surges 24% as More Americans Struggle with Rising Costs

Forget cardboard boxes and cocoa — shoplifting has become the real recession indicator. Despite a general decline in crime rates, the Council on Criminal Justice has reported a 24% increase in shoplifting incidents during the first half of 2024. According to Matt Schulz from LendingTree, “Lots of people are struggling in the face of still-rising prices, and they’re going to somewhat desperate measures to help them get by.”

• Since 2022, financial insecurity among Americans has amplified by 6.7%, affecting 36.4% of households that struggle to afford essentials like food, housing, and healthcare.

• Of those facing economic hardship, 34% of shoplifters admitted to stealing due to high prices — while 30% did so to meet basic needs and 27% to save money.

Shop small, shoplift big: Shoplifters are increasingly targeting chain stores over small businesses. As a result, US retailers like CVS and Target are enhancing security by locking up everyday items, while stores such as TJ Maxx are equipping staff with body cameras. This is frustrating customers, leading to a drop in store sales, and pushing more people towards online shopping. Kevin Thompson from Capital Group warned Newsweek, “If this trend continues, prices will likely go much higher as retailers adjust pricing to offset losses.”