This morning, major stock markets experienced significant drops, with Japan's Nikkei 225 index falling by over 12%. Disappointing quarterly results from the overheated US technology sector have compounded the weak data from the US job market. Increasingly, investors are anticipating an imminent economic downturn in the US. Critics worry that the US Federal Reserve has waited too long to lower interest rates, despite Fed Chair Jerome Powell signaling a rate hike for September last Wednesday.
While the recent market drops have been painful, this pullback is a normal and healthy part of bull markets. We do not view the current sell-off as a precursor to a new bear market; rather, the market is digesting its recent gains. During the first half of 2024, the S&P 500 reached 32 record highs, and volatility has been unusually low.
Overall, we remain optimistic about the US economy and the US consumer, though we acknowledge the presence of some cracks—just not to the extent suggested by the past several trading sessions. Notably, four of the “Magnificent Seven” stocks contributed to over half of the S&P 500’s total return in the first six months of the year. There is still room for growth in the market. Approximately 40% of stocks in the S&P 500 are at least 10% below their all-time highs, with dozens of stocks still in negative territory for the year. This creates fertile ground for active stock management, as volatility allows us to take profits and reallocate them to other, more undervalued areas of the market.
The past 18 months have been exceptionally favorable for equity investors, leading some to grow accustomed to the lack of volatility. However, it is important to remember that equities are inherently volatile. Volatility is a normal part of investing, whether we choose to remember the rough times or not. The VIX, commonly known as the Fear Gauge, measures market volatility. Typically, when the price of VIX* is:
0-15: This can indicate a certain amount of optimism in the market as well as very low volatility.
15-25: This can indicate that there is a certain amount of volatility, but nothing extreme.
25-30: This can indicate that there is a certain amount of market turbulence and volatility is increasing.
30 and over: This can indicate that the market is highly volatile and there may be some extreme swings soon.
Source: Schwab
Source: yCharts as of 8/5/24
Last week the VIX jumped to over 25, a level we haven’t seen in over 18 months, confirming that we are emerging from a period of very low volatility. However, we are not at the highest levels seen historically or even within the last three years. This morning the VIX jumped to over 65, a level we haven’t seen since 2020 at the onset of the Pandemic.
It is crucial to remember that we diversify portfolios for times like these. Having non-correlated investments can absorb some of the shock in situations like the recent pullback. Spreading investments across a variety of asset classes, sectors, and geographic regions helps mitigate risk because different assets often react differently to the same economic event.
We continue to monitor the situation and evaluate portfolios adjustments as necessary, without trying to time the market. Please let us know if you have any questions.
The information contained on this site may not reflect current developments; does not constitute investment, tax, or legal advice; and should not be relied upon for such purposes. There is no guarantee that any forecasts made will come to pass. We make no representation about the accuracy of the information or its appropriateness for any given situation. This information is not an offering. Past performance does not guarantee future results.
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