Market Meltdown
“You can’t predict. You can prepare.”
Was that a market meltdown we experienced this week?? If you didn’t pay attention to any financial news or check your accounts this week (bravo to you… by the way), then you would have no idea that the US stock market indexes had a rollercoaster ride.
The Dow Jones Industrial Average (DJIA) fell by 1,000 points, while the S&P 500 lost 3% for its worst day since 2022. Then on Thursday, the US markets recovered and the S&P 500 rose 2.3%, posting its best day since November of 2022.
But by Friday, the S&P 500 index ended the week just shy of completely reversing its weekly losses. Basically, if you hadn’t paid attention to your investment account since the previous Friday, you wouldn’t have noticed much of a change. Just like a rollercoaster ride, it ended pretty much at the exact same spot it started.
Let’s take a moment to review the several factors that drove the recent stock market selloff:
Weaker-than-expected labor market data: The US added only 114,000 jobs in July, falling short of the forecasted 175,000. This soft jobs report triggered an indicator, called the Sahm Rule, that raised concerns about the strength of the economy.
Interest rate concerns: The Federal Reserve's decision to keep interest rates high sparked fears of a potential recession. Traders were hoping for the Fed to cut interest rates or hint that they would.
Speculative currency trading: The Bank of Japan's recent rate hike added to global market volatility. The popular Carry Trade, a strategy where an investor borrows in a currency with low interest rates, such as the Japanese Yen, and reinvests the proceeds in higher-yielding assets elsewhere, like the US, was no longer paying off.
Market overvaluation: The stock market had been heavily reliant on a few high-performing tech stocks, creating a fragile foundation that was showing some signs of weakness.
Here’s the harsh truth about investing… there is and will always be a reason to sell. Investors are constantly on high alert and looking for the next time the markets will sell off. Throughout history, there is always an event that can cause anxiety, fear, and the knee-jerk desire to sell. My friend Michael Batnick recently shared the chart below that highlights all the reasons people have wanted to get out of the stock market since 2009.
Source: Michael Batnick
As you can see, there have been major economic and global events that would give you pause, but the US stock market has continued to rise. Panic selling in response to a market stumble is typically the wrong move. Sitting on the sidelines typically means missing out on the best market days as investors take advantage of the lower prices and push the markets back to positive territory.
Action Items
While market selloffs can be unsettling, they are not uncommon and often present opportunities for long-term investors. Consider the following strategies to help you navigate the volatility:
Stay Calm and Avoid Panic Selling: It's crucial not to make impulsive decisions based on fear. Selling in a panic can lock in losses and prevent you from benefiting from a potential market recovery.
Stick to Your Long-Term Plan: If you have a well-thought-out investment strategy, it's usually best to stay the course. Market downturns are normal and historically, markets have recovered over time.
Diversify Your Portfolio: A diversified portfolio can help mitigate risks. By spreading investments across different asset classes and geographies, you can reduce the impact of a downturn in any single market.
Avoid Trading on Margin: Using borrowed money to invest can be particularly risky during volatile times. Margin calls can force you to sell assets at a loss.
Look for Opportunities: Market selloffs can present buying opportunities for long-term investors. High-quality companies may be available at discounted prices. So be ready to take advantage of these opportunities.
One of the most important parts of a financial planner is being a reassuring voice and educated opinion when the market jitters hit. I’m keeping a close eye on the markets and monitoring data that could impact the economy… so you can focus on the things in your life that are more important.
Have any questions or concerns about the markets? Just book a quick call with me. 🙂
~Alex
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