Phew, we made it through August! It's all unicorn and rainbows right now, but what a wild ride at the start! Coming off July, financial markets seemed rather calm and collected, but on August 5th, financial markets around the globe faltered like a fractured hockey stick.

On August 5, 2024, several factors contributed to fear and uncertainty that set Wall Street on fire, leading to a sharp decline in stock prices (CNN: "Why the stock market is freaking out again"). The Dow tumbled more than 1,000 points and the broader market plunged 3% on that day (CNN: "Why the stock market is freaking out again"). This fear and uncertainty created panic selling as investors rushed to exit their positions as concerns mounted over a slowing U.S. economy (The New York Times: "U.S. Stock Market Sees Biggest Daily Drop in Nearly 2 Years") on the back of a softening job market and the potential impact on consumer spending.

The increase in the unemployment rate to 4.3% in July and the triggering of the "Sahm Rule" are significant indicators of potential economic challenges. It states that when the three-month average U.S. unemployment rate rises by 0.50% or more from its 12-month low, a recession is underway. If the softening job market persists, there could indeed be repercussions for consumer spending. A decrease in employment opportunities often leads to reduced consumer confidence and spending, potentially creating a cycle that further impacts the job market.

And to make matters worse on August 5th, Japanese interest rates rose and yen strengthened which led to the unwinding of the Japanese yen carry trade. This had reverberating effects on global markets and contributed to the overall market volatility (Vantage: "Crisis on Wall Street: Inside the Turbulent August 2024 Market Crash") as investors sold out positions to cover loans used to buy securities.

It was so bad, the VIX reached a high of 65.7, a level only exceeded in the global credit crisis in 2007 and COVID in 2020. But the good news is that shortly thereafter the VIX retreated to normal levels the same day and closed at 38.57 (https://ycharts.com/indices/%5EVIX/level). Today the VIX stands around 16 so you can see how the fear gauge has abated significantly.

Then the calm came after the storm. Thereafter, data numbers with regards to the economy kept flowing in as expected. Canada's labor market showed signs of deceleration in both employment and labor force growth giving way for more rate cuts by the Bank of Canada, complimented by the fact that housing activity took a break in July after a strong June (TD Economics Weekly Bottom Line). However, this could be short-lived given that rates are on the slide and the economy remains resilient. In August, Canada's annual inflation rate dropped to 2.5%, aligning with economists' predictions and reinforcing expectations for a third consecutive interest rate cut in September.

Andrew DiCapua, Senior Economist at the Canadian Chamber of Commerce, emphasized the importance of achieving price stability, noting that while Canadians are feeling financial strain, the Bank of Canada is expected to continue lowering interest rates to promote economic growth as inflation eases.

Governor Tiff Macklem has expressed growing concerns about maintaining interest rates at elevated levels for too long, emphasizing the need to stimulate economic activity. The Central Bank recently lowered its policy rate, bringing it to 4.5%. Overall, the street expects another 75bps cut by year's end which could bring the overnight rate to 3.75%.  Wouldn't that be nice? Especially for those with variable rate mortgages, i.e., ME! Lol.

In the US, the story was the same. Inflation fell below 3% for the first time since March 2021 and labor markets peeled away another layer of heat in July. Not surprising though, the labor market experienced a softening trend, with job growth in April and May below prior estimates. However, in June, the economy added 206,000 jobs, surpassing consensus expectations. (https://www.bea.gov/news/glance).

Moreover, investor sentiment was further boosted by better-than-expected ISM survey numbers and US retail sales surpassed expectations in July, rising 1.0% month on month. It's great news and gives truth to the U.S. Bureau of Analysis who foresees real GDP growth averaging 2.3% in 2024 (https://www.bea.gov/news/glance).

So, what's ahead for September? Well, I don't mean to burst bubbles, but the markets have historically performed mixed as they moved out of August and into September. According to historical data, the S&P 500 Index has had an average return of -0.31% in September over the past 50 years (1971-2020), making it the worst-performing month in that period (https://www.schaeffersresearch.com/content/analysis/2021/08/31/august-is-over-but-the-worst-month-for-stocks-is-ahead). This trend is also observed for the Dow Jones Industrial Average (DJIA) which posted an average return of -0.80% in September over the past 21 years (2000-2020) (https://www.barrons.com/articles/the-worst-stocks-market-month-is-coming-up).

BUT……it is election year. The latest information, there has been a notable sense of enthusiasm surrounding Kamala Harris and Tim Walz's election campaign. Kamala Harris, as the first female Vice President of the United States, has brought renewed interest and excitement to the political landscape. Her historic achievement as the first woman and woman of colour to hold this position has garnered significant attention and support from diverse communities.

In Governor Tim Walz's re-election campaign in Minnesota, there has been a growing sense of optimism and momentum. Governor Walz's leadership during the challenging times of the COVID-19 pandemic and his efforts to navigate and mitigate its impact have earned him support from constituents. His focus on public health and economic recovery has been well-received by voters, contributing to the positive sentiment surrounding his campaign.

Overall, the campaigns of Kamala Harris and Tim Walz have drawn attention and generated enthusiasm, with the historical significance of Harris's position and Governor Walz's leadership during a crisis being key factors contributing to the positive outlook for their respective election efforts.

On the opposite side of the aisle, Republicans continue to battle for shelf space, and have been falling behind as some argue that a second term of Trump could lead to global chaos due to various reasons. One argument is that a continuation of Trump's presidency may pose enormous risks to the economy (The Enormous Risks a Second Trump Term Poses to Our Economy – New York Times). During his initial term, Trump's policies and initiatives, such as tax reforms and trade wars, often sparked uncertainty and concerns in global markets. A potential second term under Trump could exacerbate these economic uncertainties, possibly leading to financial instability and market disruptions.

Moreover, there are concerns about the implications a second term of Trump might have on U.S. foreign policy and global affairs (What a second Trump term would mean for the world – Brookings). Analysts suggest that a re-elected Trump could bring more unpredictability and disruption to international relations, potentially straining alliances (i.e., NATO) and escalating tensions in various regions. The uncertain nature of Trump's foreign policy approach and his unconventional diplomatic style are cited as factors contributing to the potential chaos in global geopolitics. In essence, the apprehension regarding a second term of Trump creating global chaos stems from fears of economic instability, foreign policy unpredictability, and the potential impact on international relations.

Only time will tell but we'll know after the election in November what to brace for or what to happily embrace! With that, I'll end it there and until next month… that's all folks!