If you have turned on the news or had a conversation around the water cooler over the past week, you have certainly heard that volatility has returned to the stock market. Headlines like “Dow sinks more than 1,000 points in global market sell-off” and “Wall Street Hammered Amid Plunging Global Markets” led on all media outlets, causing increased viewership and traffic to their websites. So – what happened? And is it as concerning as the media makes it out to be? Let’s discuss it below.
What happened in the markets over the past week?
- The S&P 500 set an all-time high on July 16th at 5,669.67. Since that date, and as of writing this on August 9th (only 18 trading days later) the S&P 500 has declined ~7% from the all-time high, while still remaining up 11% year-to-date.
- During the first few days of August, global markets corrected after a series of disappointing economic data, including a weaker-than-expected jobs report, an increased (and trending upwards) unemployment rate, and softening manufacturing data. This data falls on the backdrop of a general belief that the Federal Reserve appears to be unwilling to reduce rates until September, at the earliest.
- Simultaneously, traders were unwinding carry trades (trading involving borrowing a low-cost currency to invest in another currency) based in Japanese Yen, causing significant selling in US equities.
- Without a doubt, investors were spooked by a confluence of events/data and indiscriminate selling occurred, led by the larger market cap-weighted “tech” names. To say the least, it resulted in “risk-off” trading, as the recession word reappeared back in many economic commentaries.
- If traders were looking for an opportunity to take chips off the table, one was certainly presented at the beginning of August.
What are economists saying about the economy?
- Weakening economic data is demonstrating a slowing of the economy. The elephant in the room is whether this is solely a return to a pre-pandemic era economy, or if it is the beginning of a recessionary environment.
- There is still data that shows an economy that is chugging along. Corporate earnings and GDP are growing. The US economy is still adding jobs, albeit at a slower pace. Consumers are continuing to appear relatively stable.
- Belief in more rate cuts has increased over the past several days/weeks, with increased pressure on the Federal Reserve to begin reducing rates, with several even calling for a “special” rate cut to occur in between FOMC meetings.
What should investors be doing now?
Without a doubt, everyone alike is trying to determine where the economy is in the boom/bust cycle. If we are not in a recession, we are nearing a recession. It is the quintessential description of the economic/business cycle. So – as investors, what should we do about it?
- Stay the course. Markets go up and markets go down. While this data has varied depending on the source and when it was calculated, the markets, on average, lose 3% seven times a year, 5% three times a year, and 10% nearly once a year. Stay the course and focus on what we can control.
- Focus on the long-term. Changing investment strategy based on 18 trading days can result in poor choices and emotional decision-making. A month’s worth of market movements shouldn’t change investment philosophies for the better or the worse.
- The first five trading days of August were a good reminder of how quickly markets can reverse course and how quickly volatility can spike. Take a moment to consider your risk tolerance and proximity to liquidity; Does your allocation still match your timeline? If you do not need the money for several years, do not overreact. If, however, time has passed and you are now closer to needing liquidity, let’s review where your liquidity is coming from.
- We are only a few percentage points away from the all-time highs in the S&P 500. Now is a great time to consider financial planning thoughts such as paying off debt, gifting to charity, etc. Just as low markets bring opportunities to foundational financial planning, so do high markets.
- Take a moment to review the intrinsic risk among the highest-flying, largest P/E ratio names. Is a rotation due – and if so, how would that affect your portfolio? We have worked hard to stay true to our beliefs in modern portfolio theory, while not chasing returns and flashy names.
As always, we are here to help and answer any questions you may have.
Disclosure
Ballast, Inc. is a registered investment adviser with the SEC. Registration with the SEC does not indicate that the adviser has achieved a particular level of skill or ability, nor is it an endorsement by the SEC. All investment strategies have the potential for profit and loss. Ballast, Inc. is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation.
