Executive Summary 

• Markets have settled out after a 5%+ correction over the last few weeks, with equities rebounding and volatility gauges returning to more normal levels.
• A key catalyst was the unwinding of a popular hedge fund trade that was short yen and long U.S. tech stocks, but positioning now appears less extreme.
• Concerns over the health of consumers and the labor market were contributing factors to the market correction, though those fears may have been overdone.
• The U.S. economy remains in a late-stage expansion, which continues to warrant balanced portfolio positioning relative to long-term policies.

Data shown in the left panel are total money market fund assets through time in trillions of U.S. dollars. Data shown in the right panel represent estimated inflation adjusted monthly income from money market funds in billions of U.S. dollars. Monthly money market fund income is derived by multiplying the yield on Vanguard’s Federal Money Market Fund by the total amount of U.S. money market fund assets. Past performance may not be indicative of future results.

• Equities rebounded last week after an 8% correction from year-to-date highs. That rebound has coincided with a swift normalization in the VIX.
• At the peak of the correction, the VIX registered a 65.7 intraday high, which is rivalled historically only by the Great Financial Crisis and the onset of the COVID-19 pandemic.
  

A popular hedge fund trade that was short yen and long U.S. tech stocks appears to be mostly unwound

Shown in the left panel are net positioning figures (i.e., longs minus shorts) for Japanese yen futures based on the exposures of non-commercial entities, measured in thousands of contracts. Shown in the right panel are the drawdowns from all-time highs for the S&P 500’s information technology sector in yellow and all other sectors of the index in green. The S&P 500 is a market capitalization weighted index of U.S. large cap stocks. Past performance may not be indicative of future results. One cannot invest directly in an index.

• A common hedge fund trade this year bet against the yen while investing in U.S. tech stocks which, when unwound, contributed to the recent bout of volatility in currency markets and equities.
• Near record short bets on the yen have largely been pared back, suggesting this catalyst for volatility has largely played out for now.

Recent fundamental data suggest the economy remains resilient and far from an imminent downturn

Shown in the left panel are monthly U.S. retail sales on a seasonally-adjusted basis in billions of U.S. dollars. Shown in the right panel are weekly initial jobless claims on a seasonally-adjusted basis. Gray shaded regions represent periods of recession in the U.S.

• Key economic data last week, from retail sales to initial jobless claims, confirm that the U.S. economy is not at imminent risk of a downturn.
• The U.S. economy remains in a late-stage expansion, which continues to warrant balanced portfolio positioning relative to long-term policies.