What’s driving the recent market volatility?

Beacon Wealth Consultants’ Chief Investment Officer Hillary Sunderland, CFA®, CKA® answers your top questions about what’s been happening in the market this week.

Full transcript below.

Transcript

Hi, my name is Hillary Sunderland and I’m the Chief Investment Officer of Beacon Wealth Consultants and LightPoint Portfolios. Well, the stock market has been very volatile over the last few days and is continuing that trend today as well. So I just wanted to take a few minutes to discuss what’s driving the recent downturn in the equity market in the rally that we’re seeing in the bond market over the last few days as well.

So what has happened is that since Thursday, a few economic numbers have come in that have suggested that the economy is slowing. So on Thursday, we had some weak manufacturing data that came in that spooked the market after it came in lower than expected. And then on Friday we had a jobs report that came in weaker than expected as well, showing that the labor market is losing momentum at a faster than expected pace.

The unemployment rate ticked up to 4.3%, which was more than expected. And while a rate of 4.3% is still very good by historical standards, it wasn’t what the market wanted to hear. The market reacted strongly to both of these reports, and it’s starting to say maybe the Federal Reserve has gone too far for too long with this higher for longer interest rate environment and we are headed for recession.

So this thought really sparked a massive sell off in both domestic and international stock markets and a bit of a rally in the bond market at the same time.

So for investors, the last few days has likely been unnerving, but I wanted to tell you that it’s not time to panic about the economy. What we’re really talking about here is a slowdown scenario, not a recession. Only 12 days ago, we printed a GDP number of 2.8% annualized growth for the second quarter, and just 12 days ago, investors and economists thought that that was very much on the strong side.

Remember, the most basic definition of a recession is two consecutive quarters of negative GDP growth, and we are at a positive almost 3% as of the second quarter. When we take a step back and we look at all the data in context, we don’t believe that every recession is imminent.

While we do see economic growth cooling, we don’t see it collapsing. And the reason for that is, first of all, when it comes to the US economy, the biggest contributor of economic growth comes from the consumer, and consumer fundamentals still look fine. We’ve had 17 straight months of real wage growth, meaning that wages have been growing faster than inflation, and consumers are still strong. When you look at businesses, they’re continuing to spend, they have good balance sheets. We’ve seen about 10% growth year over year in corporate earnings in the second quarter, and the vast majority of companies are surprising to the upside.

So overall, we believe that the equity market backdrops still looks supportive of returns ahead, but that doesn’t mean that there won’t be some short-term pain as the market unwinds. Some of the concentration we’ve seen in the equity markets remember that on average the market experiences a correction, which is defined as a 10% drop from a recent high about once per year on average, and a drawdown that we’ve seen over the last few days is very much a normal part of investing in the equity markets.

I also believe that what’s happened in the last few days is really a reaction to a very long period of time, not only of a bull market in equities, but also of over concentration in the index, which I talked about in last month’s commentary. The market has rallied, specifically the S&P 500 has gone up largely due to just seven names in the index that Magnificent Seven is what they’re called performing very well because of their relation to the artificial intelligence related story, which is starting to unwind in the markets.

And so you had this period of intense concentration in the markets and you’re starting to see a bit of that drawdown, and this is not out of the norm after the furious rally we saw in the markets in the month of July.

The other thing to remember here as well is that this is a seasonally week period for the stock market. What that means is that the late summer, early fall time period, especially September heading into September, tends to be a period of time that is weak for the stock markets. You typically get a very muted or a negative return for the stock market during this part of the calendar year, and that weakness is even more pronounced in an election year like we are in today. So all that being said, it’s not surprising that we’re seeing a bit of a drawdown in the markets.

Weakness in the equity markets from time to time is not out of the ordinary. However, I do believe it’s best to stop worrying about the day-to-day moves in the market, and remember that you are investing for the long term. We are keeping tabs on what’s going on in the economy, in the stock markets. We’re making changes for you as warranted in the portfolios. And to sum it up in one sentence overall, while the economy is showing signs of slowing, as you’ll see on headlines as you watch the nightly news, we believe that the broader data are far from recessionary levels, and so it’s not time to panic at this juncture.

We appreciate your continued support and we encourage you to reach out to us with any questions that you may have.