August's market volatility, driven by tech stock concerns and economic uncertainty, has investors bracing for rate cuts and geopolitical risks ahead of election season.
Historically, March is known as the month that comes in like a lion and goes out like a lamb, but from a capital markets perspective, August of 2024 could certainly live up to that billing. No sooner did we pen our monthly commentary for the month of July, did August come roaring in.
The recent increase in market volatility, while notable, remains within historical norms as shown in the graph below. More importantly, it wasn’t necessarily unexpected either, as we have been recommending that clients remain well diversified, both within equity allocations and across asset-classes, as market corrections are a normal part of the investing experience (taking place roughly every 11 months on average) due to the cyclical nature of markets and economies.
Knowing that corrections are a normal part of market behavior is half the battle, because it’s important that they don’t distract investors from their long-term financial goals. It’s helpful to reflect on past market pullbacks to gain perspective. For instance, in the fourth quarter of 2018, we experienced a significant downturn, particularly in October and December, with the S&P 500 closing the year down 6.24%. Yet, 2019 saw a substantial rebound with the S&P 500 returning 26.29%. Similarly, the first quarter of 2020 was marked by a dramatic decline of over 30%, but by year-end, the index had risen 18.40%. As Edward Yardeni stated to Bloomberg, it feels like 1987 when the market collapsed in October but ended up positive for the year. The fear in 1987, as it is now, was an impending recession that never came to pass.
Mark Twain once said, “history doesn’t repeat itself, but it does rhyme.” While we can’t say that markets will respond the same way here, we can use statistical analysis in our favor when making portfolio and asset-allocation decisions, and the data argues against making short-term changes in response to every market gyration. The recent bout of market volatility is fairly new and volatility events tend to “cluster” due to the reflexive nature of capital markets, and thus it may take a little time to shake out, again reinforcing the need for a long-term view and philosophy.
The catalyst for the sell off is a combination of growth concerns, over stretched valuations, and the unwinding of the Yen carry trade.
Economic data indicates that while growth is slowing, it is not collapsing. Corporate earnings for Q2 2024 are strong, with notable growth since Q4 2021. FactSet reports that 78% of companies are beating earnings estimates this quarter, surpassing both 5-year and 10-year averages. Additionally, GDP grew at an annual rate of 2.8% in Q2, exceeding expectations.
The current volatility stems from market concentration and valuation extremes among large companies such as the “Magnificent 7”. Furthermore, the unwinding of the Yen carry trade, a strategy where investors borrow in low-interest-rate currencies to invest elsewhere, is contributing to global market sell-off. This could continue to influence volatility, although central banks may adjust policies to stabilize markets.
On a positive note, bond investors are seeing benefits as capital flows from equities to bonds have pushed the 10-year US Treasury yield below 4%. This reduction in interest rates is likely to spur home buying and the associated economic benefits of a strong housing market.
As always, a diversified approach to investing is the best long-term course. Market timing rarely works and missing just one or two days in the stock market will significantly reduce your investment returns. In these turbulent times, maintaining a diversified investment approach and remaining disciplined in your investment and financial plan remains crucial. Avoiding overconcentration in a particular company or sector may not always yield the highest returns, but it protects investors from significant downturns.
If you have questions, concerns, or simply want to review your investment portfolio considering recent events, please reach out to your team at Central Trust Company, we are always ready to help.
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