Par for the Course
Although we are in the heart of summer, we are not talking golf today.
Dictionary.com defines today’s title as “an average or normal amount; just what one might expect.”
Volatility in the stock market is what we investors expect.
As of Monday, the market is down 9% from its previous high watermark. This was a rapid drop, but not unheard of if you have been investing for any length of time.
Looking back over the past 35 years, the average drop in any given year is 13%. Every few years, we get a drop larger than 20%. When we keep a portion of our portfolio in equities, this is the price we pay to make a significant premium above cash or bonds over time.
Why was this selloff so swift and intense?
A few news items changed the tone. The Bank of Japan raised interest rates, surprising the markets, and causing its currency to go up. With many hedge funds and speculators betting on the Yen to fall, it caused losses for part of their portfolio. This forced hedge funds to sell other parts of their portfolios to come up with cash.
Geopolitical risks in the Middle East could be another factor. The potential for a larger-scale military conflict means investors require a greater premium to hold equities.
The last reason is the weakening labor market in the U.S. On Friday, the jobs report showed the unemployment rate had increased to 4.3%. While this is low relative to history, it is up nearly 1% from its low early this year. The unemployment rate rarely stays flat – it usually trends up or down.
Interest rate hikes are finally slowing the economy, but the Fed does not want to push too hard on the brakes. The bond market is now betting the Fed will cut interest rates at its next meeting in September. If this is just a bump in the road, the cuts to the Fed funds rate may be shallow and short. If they are longer and push rates down further, then this could be cause for concern for this economic expansion.
We remain ready to respond regardless of the market’s direction. This is why we continually discuss “process over outcomes,” rebalancing portfolios to their targets, and controlling what we can control (our emotions and responses).
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