While many of us were enjoying the long weekend, markets worldwide decided to take a turn, sparking fear and speculation about an upcoming US recession. Markets appear to be recovering, but you might still be wondering what caused such a panic on Monday and whether it’s worth a second thought.

There were a number of reasons explaining Monday’s selloff including weak economic data out of the US, weaker than expected earnings from the Magnificent 7 and other AI related stocks, seasonal economic weakness, escalating tensions in the Middle East and US political uncertainty. All of this was exacerbated by an interest rate hike by the Bank of Japan which sharply raised the value of the Yen. Institutional investors such as hedge funds have been borrowing cheap money in Japan to invest globally. The shift in exchange rates created losses for these funds, forcing them to sell out of some of their equity positions. Due to the sheer size of the trades, this selloff created a sudden drop in equity prices and fueled the recession rhetoric. This is not to dismiss the other factors that may be at play, but it is easy to forget the impact these large hedge funds can have on the market.

Here is a great article from The Globe and Mail on the various factors contributing to the recent pullback and what it could mean for the “soft landing” everyone is hoping for. It is important to remember that a recession does not immediately translate into poor investment returns. The prospect of lower interest rates will benefit many Canadian fixed income and equity holdings. As always, we continue to take advantage of volatility by regularly taking profits from outperforming sectors and rebalancing into lower priced securities, setting you up to take advantage of the upswing when it happens. Although not all signs point to a recession, just know we are in a good position for whatever happens.

Keep calm and carry on!

Livingston Wealth Management Group