Perspectives on Market Volatility

07 Aug 2024

Stocks must have gotten the memo that August tends to be weak historically. July, the eighth positive month in the past nine, was quickly forgotten as the beginning of August greeted us with a selloff. The primary catalyst was August 2’s weaker-than-expected employment report, which ignited concern that the U.S. economy could tip into recession. Several additional factors exacerbated the selling pressure:

• Overly bullish sentiment and elevated valuations. Investor sentiment had become a bit frothy, particularly in the tech sector, and stocks had simply gotten a bit ahead of themselves, as discussed in LPL’s Midyear Outlook 2024: Still Waiting for the Turn.
• The historically weak month of August is a logical time for a selloff to reset investor sentiment to more normal levels.
• Increased scrutiny around the payoffs for artificial intelligence (AI) investments. This scrutiny followed some evidence of slowing consumer demand during second quarter earnings season.
• Leverage in the financial system. Borrowing in the yen (the so-called carry trade) is unwinding as global markets fall and the yen surges — plus some institutional traders appear to have been caught offsides in the downdraft, driving more forced selling.

So, what now? First, this is not the time to panic. Remember, pullbacks and corrections — as painful as they are — are a normal part of investing. Think of them as tolls to pay on the road to attractive long-term returns. The S&P 500 and its predecessor indexes have gained 11.5% annualized since 1950, through some of the worst wars, terrorist attacks, recessions, financial crises, pandemics, and natural disasters in history. And that’s while averaging a drawdown of over 10% per year – even in up years.

Turning to potential catalysts for a rebound, perhaps the most obvious one is the Federal Reserve (Fed). A 0.5% rate cut in September is now firmly on the table, and an emergency, intra-meeting cut, though unlikely, is possible if the economy weakens further. Simply put, restrictive monetary policy is no longer necessary. Expect the Fed to quickly get to a neutral stance, despite the perception that they might influence the election. “Higher for longer” created room for cuts.

Other drivers that could help turn stocks around include better economic data, reassuring commentary from corporate America, and more progress unwinding leveraged trades. Fundamentals still look good enough to keep this bull market going even as the economy slows into the election. Additional downside may be modest, and opportunities may soon emerge, but bottoming is a process. Be patient and allocate wisely.

 

Important Information

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

All data is provided as of August 6, 2024.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.

All index data from FactSet.

The Standard & Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Past performance does not guarantee future results.

Asset allocation does not ensure a profit or protect against a loss.