An August Investment Update
Happy August everyone! The summer has started to wind down and unfortunately, the same could be said about the stock market recently. The temperatures and stock prices were hot, hot, hot, living was easy… and then August came. Did “Fall” come early again this year? It was one year ago at the start of August 2023 when U.S. stocks peaked at 4,607 on the S&P 500 and started to descend into correction (defined as a decline of greater than 10% from the peak)1. Over the next three months, the S&P declined and eventually bottomed at 4,103 by Halloween1. Honestly, I kind of forgot about that hiccup in 2023! It was such a good year for stock returns, and it's been pretty much a straight line up since last Halloween. I guess my own recency bias took over and that 10% correction was nothing but a thing of the past. In the roughly 9 months that have followed, the S&P has climbed significantly and recently peaked at 5,669, well above the highs from last August1.
It's that peak that probably skews how we should react to a day like August 5th. Sharp losses sting hard, yet if you zoom out, the S&P 500, Nasdaq and Dow Jones are all still positive for 20242. And if you zoom out even further, the S&P 500 is solidly up double digits year over year2. As we hear and feel the negative headlines, it is key to note that in our opinion, underlying economic and market fundamentals have not materially changed. And that’s usually what drives our process for change. Adam and I regularly discuss fund tweaks and each quarter we assess the actual impact of rebalancing our stocks and bonds. Even with a rough couple days, we do not feel compelled to make changes “just for the sake of change.” While it’s very human and rational to want to sell out of stocks sometimes and flee to safety, we know that to do so could ultimately be a very expensive decision.
As our reviews continue, ratcheted up a bit by the recent drops, we know it is important to communicate to you for two key reasons; one, to hopefully calm any fears since the headlines tend to feel pretty darn harsh, and two, to let you to know that our head isn’t buried in the sand – we are actively reviewing things and following our well-defined process. So, with that in mind, here are a couple quick thoughts we wanted to share.
Why is this happening?
It’s often dangerous to say “this is why” because the market moves up and down often for a multitude of reasons, often in competition with each other. Yet, the consensus seems to be that the stock market volatility of the last few days is based on U.S. recession worries and the possibility that the Federal Reserve is now a little behind the curve on cutting interest rates. What does that mean? Think back to 2021 and 2022 when prices soared post-Covid and inflation was kicking our butts. The Federal Reserve needed to rapidly raise interest rates – which is its tool to “cool a hot economy” and try to bring inflation back to “normal levels.” They were mostly successful in doing so, but that came with its own risk. Leaving rates too high for too long can also send us into a recession. Take mortgage rates (in parallel to the Fed Funds Rate) these last 2 years. If you keep borrowing rates as high as 7% or 8% after they were recently sub-3%, that’ll scare some buyers away, right? Yet, while everyone anticipates the Federal Reserve cutting rates, they have yet to do so and now there’s fear that they missed that opportunity. Hence, now we are seeing/reading/feeling the skepticism and fear.
So stocks are moving down because of that?
Seems so. The market is always forward looking. After a really strong start to the year, there are certain ways of analyzing the market that are now creating some concern. Did we go too high too fast? Probably. The stock market (S&P) is getting close to being down 10% from its peak. But if we look closer, it’s not all stocks that are getting hit hard. Technology stocks, which had been leading the S&P higher and higher this year, are now experiencing the reverse – their pullback is more pronounced than the broader markets. In fact, several other sectors are somewhat flat for the last few weeks. What does that mean for you? Hopefully, that diversification feels like it’s working. For a little while, growth stocks have felt like the only thing worth owning. Now owning “value stocks” or “value mutual funds” along with owning bonds has softened the drawdown of the last few days.
I see that stocks are down. What about bonds?
Great question. 10-year Treasury yields are down to around 3.7-3.8%3. It was close to 4.70% as recently as 3 months ago. What does that really mean for investors? Remember that there is an inverse relationship between bond yields and prices. So dropping yields means bond values are actually going up right now. And if the 10-year was yielding 4.7% as recently as April 25th, that means bonds are FINALLY feeling like they are providing some support as stock market volatility picks up. It hasn’t felt that way for a little while.
Sounds like good news, bad news…
Yes, it’s a mixed bag right now. Stocks being down and fear and uncertainty dominating the markets are never good things to witness. But, there’s some good to come from that as well. Sell-offs like this are sometimes just what the market needs to get those pesky short-term investors out of the game! Not all investors have a long-term view (think many big institutional traders) so patience is not always the over-arching approach of all investors. We believe that could be what's driving things right now too. As potential evidence, the VIX (volatility index) which can be a measure of fear, spiked to Covid-19 levels on Monday and then quickly retreated4. Personally, that feels extreme for where we are today. The stock markets can easily mirror a “run on the banks” style drawdown in a short period before cooler heads ultimately prevail once there is more clarity on the outlook for the U.S. economy.
Overall – we are hopeful this is just a typical overreaction to some short-term news that in an ideal world would have happened in a more orderly fashion. Life is not always orderly though. We also think it’s important to remember that short-term corrections can happen within longer term bull markets. Meaning, taking a breather is not only healthy, but normal.
How long do we expect volatility?
The Chief Investment Officer for Great Valley Advisor Group Eric Parnell says “short-term corrections within a bull market historically last anywhere between 2 to 8 weeks on average with declines ranging from -5% to -12% along the way before finding a bottom and resuming their move higher.” But, it always feels dangerous to guess, because the market will humble us as soon as we think we have all the answers! Eric Parnell also said yesterday “We should not be surprised if we find ourselves picking apples or collecting Halloween candy in 2024 with an S&P 500 trading in the 4,900 to 5,100 range, as this would be nothing more than a healthy pullback within a normally functioning market moving in a longer-term uptrend.”
We hope this helps provide some context for what’s going on. Know that we are here to talk with you, share what we think and answer your questions and of course will communicate if we feel changes need to be made. We also want to remind you that we are intentionally passive in our approach to these types of swings in the market. Our key task with your allocation is to monitor whether underlying economic and market fundamentals change in the coming weeks. If they do, we are prepared to make changes to the overall allocation. If they don’t, we will continue to evaluate the merits of fund changes or a general rebalance as we always do. Either way, we are keeping a close eye on things and are prepared for whatever is ahead.
- https://finance.yahoo.com/quote/%5EGSPC/history/
- https://app.koyfin.com/charts/gm/id-yjl5rm
- https://app.koyfin.com/charts/g/bn-dm6gok?i=g
- https://app.koyfin.com/charts/g/id-fqsief?i=g
Investment Advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Great Valley Advisor Group and Haas Financial Group are separate entities. This is not intended to be used as tax or legal advice. Please consult a tax or legal professional for specific information and advice.
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