After a relatively calm 18 months of upward movement the S&P 500 experienced a decline of nearly 9% over the past week, while the Nasdaq fell over 10% and moved into a correction. We suggest investors ignore the sensationalism of the media, focus on the fundamentals of the economy (which remain strong) and use this as an opportunity to strategically deploy capital.
S&P 500 Intrayear Declines vs. Performance 1 Year Later
QUICK TAKE: Market volatility is rising, use it as a buying opportunity
One week ago major new headlines boasted about a stronger US economy, robust consumer spending activity, and declining inflation (See our previous post – Rate Cuts Are Normal Near All-Time Highs). One week later, following a weak labor market reading, markets sold off sharply as investors became concerned about the looming risk of a recession.
In our view the recent sell-off is not indicative of an economy headed for recession and can be attributed to three key items:
- The unwinding of a major currency “carry trade” between the Yen and US Dollar. (Read more about it here – WSJ – Carry Trade Reversal)
- Overreaction to the recent weak economic labor data
- Concerns the Fed will cut rates too late
Quick comments on these:
- The currency trade is temporary, and the associated volatility from it will pass.
- Labor market data did soften, however overall employment remains strong and consumer sentiment robust, spending activity high, and job openings still plentiful.
- The Fed has made it clear it is data dependent and will not cut rates pre-emptively. Given the strong 2Q24 GDP, and other recent economic data points, there is nothing to suggest the Fed needs to accelerate its timing of rate cuts.
Despite the limited fundamental aspect of this data markets sold off sharply on Monday, experiencing their worst intraday performance since 2020. However, as our chart above shows, the stock market has experienced an intrayear decline of 5% or more in almost every year since 1957. And when it occurs the market recovers and is also positive one year later almost every time.
Instead of focusing on the media and noise we suggest investors use this an opportunity to strategically deploy capital and rebalance portfolios. During times of panic and sell-off entry prices on many stocks present great opportunities to build generational wealth.
ENDNOTES
Disclosures
This commentary reflects the personal opinions, viewpoints and analyses of the author providing such comments, and should not be regarded as a description of advisory services provided by Defiant Capital Group or performance returns of any Defiant Capital Group client. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Defiant Capital Group manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary.
This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her advisors.
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
A word on risk
All investments carry a certain degree of risk, including possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. Equity investments are subject to market risk or the risk that stocks will decline in response to such factors as adverse company news or industry developments or a general economic decline. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Non-U.S. investments involve risks such as currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. This report should not be regarded by the recipients as a substitute for the exercise of their own judgment. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.
