July Portfolio Update: Genevieve makes some moves

Hey, GRIT VIP! 🚀 

What a wild month it’s been!

The S&P had its worst and best day in a year over the last week!

NASDAQ is now down -7.7% from a record high – NOT IN CORRECTION TERRITORY ANYMORE (it was last week).

The S&P 500 is only down -3.8% from a record high – so it is NOT in correction territory.

A reminder that both are up significantly higher YTD than long-term averages: S&P +13.93% and NASDAQ +14.4%

Let’s get into the NITTY GRITTY:

Past Month:

1. VOLATILITY SOARING

Meltdown Monday (August 6th) saw the VIX surge to +65—levels we haven’t seen since 2020 and 2008.

VIX has still been up +66% in the past month.

But it’s fallen over 47% from Monday to Friday, the most significant 4-day decline in history.

Buckle up—volatility is here to stay (and it’s only getting wilder)!

2. U.S. Officially in Recession According to Sahm Rule

August 2nd Jobs Report: Unemployment rose to 4.3% in July (up from 4.1% in June), the highest since October 2021 and above market expectations.

The uptick didn’t spook markets alone because the "Sahm Rule" was triggered, signaling a U.S. recession.

What’s the Sahm Rule? Named after Fed economist Claudia Sahm, it suggests a recession is likely if the 3-month average unemployment rate rises by 0.5% from its low. According to Bloomberg, the current 3-month average is 4.1%, 50 bps higher than the 12-month low.

JP Morgan notes the Sahm Rule has accurately predicted every recession since 1970 with only two false positives (1959 and 1969), which were just a few months premature.

Goldman Sachs even raised the probability of a U.S. recession from 15% to 25% next year.

And last week, Jerome Powell warned that downside risks to employment are "real now."

With the Sahm Rule signaling a recession...

I wrote this thread – READ HERE!

3. The S&P liquidity index drop is the worst since 1996 

Bloomberg's analysis of S&P liquidity is slipping under the radar but demands attention. Trading liquidity has plunged over the last two weeks, marking the steepest decline since at least 1996—the entire dataset history.

“Maybe things will improve when trading desks are fully staffed (because it’s summer and many of the Wallstreet elites are on vacation), but last month’s price action and liquidity drop could leave a lasting impact.”

Ouch.

4. S&P EARNINGS BEAT EXPECTATIONS

Over +455 companies have reported (85.4% of market cap) earnings. 

Here's what we know so far: 

- Over 79.7% of companies beat expectations (above the post-pandemic average of 78.5%) 

- EPS growth of +13.3% is crushing preseason estimates of 8.3% 

- EPS growth ex-Mag 7: +8.7%, doubling the 4% consensus 

- The materials sector is the only one with year-over-year declines 

- Net income and operating margins still higher than a year ago 

- Companies beating estimates are rewarded with 1-day price pops: +1.5% (EPS), +1.73% (sales), +2.51% (both) 

- Misses are punished hard: -3.15% (EPS), -1.24% (sales), -2.08% (both)

5. SocGen: Investors unwind biggest carry trade ever!

According to SocGen, investors borrowed Japanese Yen at low rates and reinvested in higher-yield assets like Latin American bonds, the Mexican peso (+10%), Mag 7 shares, and even Bitcoin.

But investors got spooked with the Bank of Japan raising rates (still just 0.25%—the lowest in the industrialized world) and the Fed poised to cut.

The trade is unraveling, triggering losses that force more sales to meet margin calls. This creates a vicious cycle of selling, losses, and even more selling.

It’s so intense it caused Japan's stock market to suffer its 2nd-largest drop in history.

Could this be the most significant margin call ever?

According to Deutsche Bank, the Yen carry trade amounts to a whopping $20 trillion, or 505% of Japanese GDP based on Japan’s government balance sheet assets and liabilities mix. (Kobeissi Letter)

Banks are split on the unwind!

JPMorgan strategists think 75% of global currency carry trades are done, but BNY disagrees. 

They see more to come, predicting the dollar-yen pair could plunge toward 100—a 30% drop—signaling a stronger yen and more pain ahead.

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