Dating back to our firm’s inception in 2018, we rarely have felt compelled to put pen to paper to help make sense of substantial intra-quarter events, given our long term-investing mindset. As investors, we try to discern what is noise from what is impactful. Furthermore, we acknowledge there always feels like a reason to be looking over your shoulder, it’s human nature.
Past times where we had considered such communication included the early stages of the Pandemic in 2020 or even the Silicon Valley Banking Crisis in 2023. These types of events often are misunderstood, generate fear, and cause individuals to make less thoughtful investment decisions.
On August 5th, we walked into our office and on the TV was renowned economist and University of Pennsylvania Wharton School of Business professor Jeremy Siegel. He was shouting adamantly on CNBC’s “Squawk Box” that the Federal Reserve needed to have an emergency meeting to immediately cut interest rates given the dire nature of times1.
August 5th was the 3rd straight trading session that stocks had moved lower while long term interest rates also followed suit. The VIX, which is a measure of the expected volatility of the S&P 500 index looking forward, saw its 3rd largest 3-day percentage increase since the early 1990’s2.
The drivers of the August market sell off earlier this month were multi-faceted including:
- Ramifications of the unwinding of the Yen Carry Trade, which caused forced selling of stocks.
- Soft economic data created concern that growth was slowing dramatically.
- Investors learned the “Oracle of Omaha” Warren Buffett added to his historic cash pile.
We have good news – we believe this is different. And no, there will be no emergency meeting to cut interest rates as this has happened only 7 times dating back to 1987 and is reserved for truly dire times, such as Black Monday (1987), the horrific attacks on September 11th (2001), and the Global Financial Crisis (twice in 2008)3.
Our reaction as the market sold off was that this is normal (see the bar chart below), we were long overdue for it, and ultimately nothing had fundamentally changed – only sentiment.
We did, however, view this as an important buying opportunity for clients. History has taught us a lot of value is added when you buy during periods of extreme market dislocation as shown by the returns in the chart below.
Following the S&P 500’s worst day in nearly 2 years on August 5th, it proceeded to rise 8 consecutive sessions from August 6th until the streak was broken on August 20th 5. Once again, the S&P 500 is knocking on the door of its all-time high.
Looking Ahead
We’re at the tail end of the 2nd quarter’s earnings season, which largely has gone better than expected with companies less concerned about a recession, labor shortages, and supply chain disruptions.
The Federal Reserve has shifted more attention from inflation to the health of the labor market. The labor market data will likely guide the pace and the magnitude of interest rate cuts going into year end. The market is currently pricing in slightly less than a 1% cut before year end6. Predicting how much and the pace of cuts is challenging, but the more important takeaway is that rate relief is on the horizon.
Lastly, given the upcoming election we would expect the current administration will do everything in its power to generate voting momentum and stimulate the economy, through mechanisms such as further student loan forgiveness and payments via the employee retention tax credit.
Stick To Your Investment Plan
As investors, we’re taught that markets and market participants are rational actors. The sell off in early August that was driven by more sentiment than fundamentals tests that theory and calls for staying rational when others are not – even if in that moment it doesn’t feel good.
In the lead up to the election in November, it is fair and again normal to continue to expect more volatility and maybe even another sell off. Since the worst days in the market tend to cluster around the best days, we continue to encourage our clients to stay invested and not try to time the market, as this is the easiest way for investors to miss out on the biggest up days, as we saw in early August.
Bryce Goldbach, CFA®
Portfolio Manager & Wealth Strategist
8/21/2024
CITATIONS
[1] https://www.cnbc.com/video/2024/08/05/the-fed-needs-to-make-an-emergency-cut-says-whartons-jeremy-siegel.html “The Fed Needs to Make an Emergency Cut, Says Wharton’s Jeremy Siegel.”
[2] https://x.com/charliebilello/status/1820830640494797172
[3]https://www.barrons.com/articles/fed-rate-cuts-history-emergency-fc5847a7 ” The Fed Rarely Cuts Rates Between Meetings. Here Are 7 Crises That Forced Its Hand.”
[4]https://awealthofcommonsense.com/2024/08/this-is-normal-2/ “This is Normal.”
[5]https://www.cnbc.com/2024/08/04/stock-market-today-live-updates.html “Dow Tumbles 1,000 Points, S&P 500 Posts Worst Day Since 2022 in Global Market Sell-off: Live Updates.”
[6]https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html “CME FedWatch.”
[7] Goldman Sachs “Market Snapshot as of September 2023.”
DISCLOSURES
Past performance is not indicative of future results. The material above has been provided for informational purposes only and is not intended as legal or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Information obtained from third-party sources is believed to be reliable though its accuracy is not guaranteed, and Asio Capital makes no representation or warranty as to the accuracy or completeness of the information