STEPHEN: Hello, everyone! Welcome back to another episode of the Smart Money Show. I’m Stephen Rischall, your host, and joining me today is my partner in financial wisdom, Chris Carter. How are you doing, Chris?

CHRIS: Hey, Stephen! I’m doing great, thanks. Excited to dive into today’s topic—it’s one that’s on everyone’s minds these days.

STEPHEN: Absolutely. We’re here to talk about market volatility, something that’s been making a lot of headlines lately. You know, it seems like every time you check the news, there’s some new headline about the market taking a dive or making a sharp recovery. But here’s the thing, Chris—this is nothing new, right?

CHRIS: That’s right, Stephen. Volatility is a big part of investing in the stock market. It’s something that investors need to expect, whether the market is going up or down. While it can be unsettling, especially when it’s triggered by major events, it’s important to remember that over the long run, the market tends to be resilient and recover.

STEPHEN: Exactly. It’s like riding a roller coaster—you have those ups and downs, but the ride eventually comes to a smooth stop. Or at least, that’s the hope, right?

CHRIS: That’s a good way to put it. And speaking of major events, we’re approaching the U.S. presidential election, which is often a trigger for volatility. People start getting nervous about potential changes in policy, and that uncertainty can shake the markets. We’ve seen this before, and we’ll see it again.

STEPHEN: So, you’re saying we should be expecting more volatility as we get closer to the election?

CHRIS: Exactly. Elections can stir up emotions, and when emotions are high, humans make emotional decisions and markets can swing. But it’s crucial for long-term investors to stay focused on their financial plans and not just react to what’s happening in the moment. The markets may fluctuate, but over time, they generally trend upward.

STEPHEN: Let’s dig into what’s been happening recently. The last several weeks have been particularly turbulent for equity markets. We’ve seen some pretty big swings. Chris, what are some of the main concerns driving this volatility?

CHRIS: There’s quite a bit at play here, Stephen. For starters, there are worries that the Federal Reserve might be falling behind in managing interest rates amid weakening U.S. economic indicators. We’ve seen the unemployment rate tick up to 4.3% in July, and the economy added only about 114,000 jobs last month. That’s a signal that things might be cooling off a bit.

STEPHEN: I also read yesterday that the Buerue of Labor Statistics revised some of the employment numbers, and it was a big number. Turns out there were actually 818,000 fewer jobs in March of this year than initially reported. That’s the biggest downward revision since 2009, Not sure how they got that so wrong. And when you couple that with slowing consumer demand in both the U.S. and China, you’ve got a recipe for some jittery markets.

CHRIS: Exactly. The U.S. and China together account for nearly 44% of global consumption. So, when consumers in these two giants start pulling back, it sends ripples through the global economy. We’ve seen discretionary spending in the U.S. soften this year, and that’s concerning because consumer spending makes up nearly 70% of U.S. GDP.

STEPHEN: Okay, so we’ve got weaker job growth, slowing consumer demand… what about the tech sector? It looks like there’s been some unwinding of the AI trade. What’s that all about?

CHRIS: Yeah, that’s been another big factor. Investors are starting to question the massive capital spending on AI by large-cap technology companies. While these companies are betting big on AI being transformative, there’s uncertainty about when these investments will actually start paying off. This has led to some pullbacks in the tech sector, especially since investors are reassessing the costs versus the expected returns of these AI ventures.

STEPHEN: And that’s where we also see the impact of the yen carry trade unwinding, right? For those who might not be familiar, can you explain what the yen carry trade is and why it’s significant?

CHRIS: Sure. The yen carry trade is a strategy where investors borrow yen at low interest rates to invest in higher-yielding assets, often in the U.S. When the Bank of Japan unexpectedly raised rates faster than expected, it caused the yen to surge, which put pressure on those who had been using the yen to fund their investments. This has contributed to the recent sell-off in technology stocks, which are heavily impacted by this trade.

STEPHEN: It’s like a perfect storm of factors hit the market all at once. And then we’ve got the election, which just adds another layer of uncertainty, not to mention rising geopolitical tension in the Middle East, Russia and China. But one thing that’s starting to look more certain is the Fed cutting interest rates. What should we expect from the September Fed meeting and what does this mean for investors?

CHRIS: The Fed always states their rate in a range so currently, the rate is 5.25-5.5%.  This chart shows the market expectations for the path of rate declines.  For example, in the Sept meeting, the current expectation is for the rate cut cycle to begin with at least .25% but maybe even .50%.  Currently the odds are 70% for a quarter point cut and 30 for a half point cut.

STEPHEN: Right, and you can see the most likely range where rates will be after upcoming meetings with rates expected to be a full 1% maybe 1.25% lower by the beginning of next year. Personally, I think rates will come down a bit slower than that, my crystal ball says more like 0.5% to 0.75%, but we’ll have to wait and see.

CHRIS:  Right, and obviously rates affect everyone in a number of different ways from mortgages to credit card payments.  Certainly as investors we are keeping a close eye on the future path of rate cuts as it impacts our thinking and positioning.

STEPHEN: So, what’s the bottom line here for investors? I mean, it sounds like we’re in for a bumpy ride, but is there a silver lining?

CHRIS: The key takeaway is to stay focused on the long term. Yes, there are a lot of concerns right now, but there are also reasons to be optimistic. We’re seeing signs of a sustained earnings recovery, broadening market leadership, and still relatively stable consumer bases. Fixed Income is also playing a crucial role in cushioning some of the equity market’s downdrafts.

STEPHEN: What I’m hearing is—don’t panic, stay the course, and maybe even look for opportunities to buy on weakness?

CHRIS: Exactly, Stephen. Timing the market is incredibly difficult, if not impossible. It’s better to stay invested, especially when we believe the U.S. economy and corporate America are still in a strong position. Diversification is also key—having a mix of assets can help smooth out the ride during these volatile times.

STEPHEN: Alright, so keep calm and carry on investing. Sounds like a plan! Before we wrap up, Chris, any final thoughts?

CHRIS: Just to reinforce the idea that while volatility can be unsettling, it’s also a natural part of the market cycle. The U.S. economy is strong, and over time, we expect the markets to climb that wall of worry and move higher. It’s important to maintain perspective and remember that investing is a long-term game.

STEPHEN: Well said, Chris. Thanks, as always, for your insights. And to our listeners, thanks for tuning in to another episode of the Smart Money Show. If you learned something new or found this video helpful, send this video to your friends, because they might learn something new too. Stay informed, stay invested, until next time, I’m Stephen Rischall, that’s Chris Carter, and this is the Smart Money Show.