As Vince Lombardi once incredulously screamed from the sidelines, “What the hell’s going on out here?!?!” That’s an apt question for the market over the past week. Given yesterday’s beat down I wanted to chime in with some thoughts as I cringe at some of the headlines.
To start, the words used in the media are amazing. “Craters,” “plunge” and “rout” are a few of my favorites. They are strictly intended to drive fear and clicks. Was yesterday bad? Yep. Was it historically bad? Define historic. The NASDAQ closed down 3.43% while the S&P finished 3% underwater. A bad day for sure but nowhere near the daily selloffs we saw during Covid, the financial crisis or the dot come bubble. Both indexes have also hit all-time highs this year. So, I ask again, define historic. At the end of trading yesterday, the S&P still had a gain of over 9% YTD. It’s important to remember that these days, while painful, are normal. Pullbacks (defined as a drop of 5% or more but less than 10%) happen 3-4 times per year on average. Corrections (a drop of more than 10% but less than 20%) happen approximately once every 1-2 years. The market movement started a few weeks ago (which the media has now defined as “the great rotation”) as some profits started to be taken from the largest winners (Think Nvidia), mostly concentrated in tech and AI. There was some indication that these prices had gotten a little expensive and so profits were taken and moved to undervalued areas of the market such as small caps. This is all part of a normal market cycle.
Regarding a recession, most of what was being said over the past two years is that we want bad unemployment and job figures in order to convince the Fed that rate cutting can begin. Therefore, the market continued to price in an assumed cut which is why we saw positive returns the past year and a half. Now, suddenly a bad jobs report came out and it forced a selloff because we are hurtling toward recession? That doesn’t track. It’s the report we were looking for. Next, I saw people point to the yield curve (a recession indicator) uninverting and saying, “I told you so.” Also doesn’t track. The yield curve has been inverted since July 2022. It’s the longest yield curve inversion in history and still no recession. How long until a recession happens can you point to the yield curve?
None of that information means the market is going to the moon the rest of the year. What we are seeing is normal market movements, even inside of a continued bull market. If you are a long-term investor, this is a nothing burger. In fact, diversification is actually working for the first time in a long time. The bond market is up almost 3% over the last month compared to an almost 7% drop in the S&P. This provides real rebalancing opportunities. Additionally, you’re buying in at some lower price points which lead to better growth opportunities over the long term. If you are nearing, or in retirement and are in one of my actively managed portfolios, we had already reduced the equity exposure by 10% and had that in cash so we weren’t drawing on down money. Now is the perfect time to revisit your plan if you are fearful. Understand how you are invested and why, and if changes need to be made because you are completely unnerved over the last few days. All of that works. I’m a phone call or email away!
Please feel free to share this with anyone you think might benefit.
Rob