What’s Happening to the Markets?

What’s Happening to the Markets?

In case you haven’t noticed, the market winds have dramatically changed. Until recently, investors have scratched their heads as their bonds showed zero returns and anything other than the large technology companies showed less than stellar performance. It was evident to longtime investors, such as myself, that a market of 500 companies (S & P 500) where the majority of gains were the result of less than 5 was not a healthy situation that could continue forever. 

In July, it appeared that things were changing. Hints of potential future rate cuts by September may have led to a sector rotation out of the large technology companies into interest rate sensitive companies, especially small caps. The small cap sector’s advantage over large was more than 10%. There was no reason to think there was anything out of the ordinary happening. Then the calendar flipped to August, one of the three worst months of the year for stock markets, and things suddenly started to unravel. First, Fed Chair Powell was unwilling to signal rate cuts, then the job report was disappointing and that was capped off by a weak manufacturing index number that led many to believe that a recession was imminent. 

What happened next was a spike in the fear index known as the VIX, interest rates fell sharply on the 10 year and longer duration bonds and selling in stock markets began in earnest. A glance at various sectors not normally hit as hard showed that even gold, crypto and oil were not spared during this route. Over the weekend, reports surfaced that acclaimed investor Warren Buffett had reduced his stock positions by $75 billion, raising cash from sales of Bank of America and 50% of Apple. Monday morning the stock markets all opened much lower and fought back during the day to end somewhat higher. 

Here are some possible explanations for the market volatility:

1. Investors in the large technology companies involved with AI Nvidia and others had driven prices too far too fast. The benefits of AI are still yet to be fully understood and the profits from AI are even more difficult to quantify. This over-exuberance has been seen so many times before with other new technologies. When a market corrects, investors with gains move quickly to capture them as prices fall fast.
2. The three factors mentioned above - no rate cut, unemployment and manufacturing - may have led to technical computer generated selling which can play a large factor in market movements. 
3. It’s August. As I’ve said many times before, it is not uncommon for markets to correct in August, September and October which are traditionally three of the months when correction occurs. 
4. Adding to the volatility, markets hate geopolitical conflicts. Unfortunately, Israel and Iran appear to be more likely to escalate their friction into more than a small skirmish. A widened conflict can affect oil prices and can lead to short term panic selling.
5. The political climate here in the US has gotten more interesting as Vice President Kamala Harris has shown surprising popularity as she has accepted the Democratic Presidential nomination. Markets were starting to calculate the pros and cons of another Trump administration when President Biden stepped down. Now that the race is closer, some investors may be reversing course.

The Positives

To cool inflation following $7 trillion of currency created during the pandemic, the Federal Reserve had the difficult task of removing the punchbowl without causing a recession. They were able to get inflation down to 3% by raising rates and selling a portion of their bond portfolio. However, the Fed insisted that 2% was their target and that they would want to see prices fall further as they hoped unemployment rose a bit more. Now that the unemployment numbers have cooperated and there are indications that a recession is more likely, the Fed will more likely finally reduce rates in September. Lower rates will help homebuyers, people with Home Equity lines of credit, companies that borrow to grow and investors in commercial real estate. 

Keep in mind that as numbers come in over the next months, experts will argue whether a recession has already started, is upon us or just passed us by. Until then and until our election results are known, markets will seek facts, not guesswork. Until then, expect more volatility. Regardless of who is elected, our team believes that there are many reasons to be optimistic about 2025.

Until then, as we manage fee- based accounts, we plan to sit tight at the lower end of our risk levels, possibly rotate within equity to more interest sensitive areas and add to beaten up equity sectors as we get closer to November. If you have any specific questions about your accounts or concerns about the markets, please feel free to contact us or attend one of our economic discussions after Labor Day.

Jay Gershman is the Owner and Founder of Retirement Visions LLC, a West Hartford-based financial planning firm that focuses on comprehensive life planning and financial management. For more information, visit www.allset2retire.com. Information and advice are for guidance only and opinions expressed belong solely to the author. Securities offered through Silver Oak Securities Inc. member FINRA/SIPC. Investment Advisory Services offered through Redhawk Wealth Advisors, Inc., an SEC Registered Investment Advisor. Silver Oak Securities, Inc., Redhawk Wealth Advisors, Inc. and Retirement Visions LLC are not affiliated.