What a difference a month makes. The market eased into summer with relatively smooth sailing, as the S&P rose over 3.5% in both May and June. July saw early success, but as we transitioned from July to August, we have seen the threat of war in the Middle East skyrocket, President Biden drop out of the presidential race 100 days before the election, and economic data that threatened the narrative of a soft landing. All of this coming in the span of a few days led to uncertainty and what does that lead to? Panic. And boy did we see some of that… We saw global economies experience flash crashes, led by Japan whose stock market fell 25% in three days. The S&P 500 sank 8.5% in that span, including its largest single day drop in over 2 years. This selloff was largely driven by growth fears after the July payrolls miss added concern to the already bubbling geopolitical environment. Technology stocks led the selloff with the Nasdaq falling over 13%, including an 8% drop in 2 days.
It is important to revisit the impact of the “Magnificent 7” on the S&P 500 index. Microsoft, Apple, NVIDIA, Alphabet (Google), Amazon, Meta, and Tesla now make up over 35% of the index, making you question how much of a diversified market index the S&P is. This group of stocks has been driving monster gains over the past 18 months or so, but the larger it becomes, the more vulnerable the market will be to a growth-driven sell-off. We saw the impacts as recently as this month, as questions arose around the valuations of these tech companies and their abilities to grow at these torrid paces.
Artificial Intelligence has continued to be the driver of markets over the last year. The big tech giants above have all committed billions of dollars to the AI space, and investors have rewarded those investments by driving their multiples higher. Now, there is a question as to whether the massive spending will prove profitable to the extent markets have priced in. There is no doubt AI will continue to make companies more efficient, as it has for the last 20 years, but the question lies to what extent. It could be that these companies are in fact still underpriced due to the growth AI can create, but it is important to acknowledge that these effects will take time to uncover, and the valuations will endure plenty of volatility as their impacts are revealed.
As the growth fears spread and panic selling ensued, investors were all but assured the bottom was falling out and the stocks would crater. Yet, the S&P 500 still finished the month of August up over 2% and the period from May – August up over 10%. This is yet another perfect reminder that the crowd is rarely right. If you remember August 2022, MANY experts and economists were certain we were about to enter a recession. Markets fell as people sold, with the S&P falling more than 15% over the next month, after already falling more than 10% up to that point. What happened next? The S&P 500 rallied more than 50%. Does that mean that will happen this time? Of course not – every event is unique and it is very possible the market continues to correct in the near-term. It is simply a reminder that even the smartest people get market moves wrong…often.
Another reminder: pullbacks happen every year. The average annual pullback is 13%, and that is over all types of markets. We have now seen our second 5% pullback and may well be on our way to our third, but we still have yet to hit a double digit drop in over a year. It is important to remember that these corrections are healthy, and in the long-term, major corrections have proven to always provide wonderful buying opportunities. Although simple, you only lose when you sell.
As we head into the fall and into election season, I’d be remis not to mention seasonality. Although we do not make decisions on it, September is historically one of the worst performing months. For the past four Septembers, the market has been down 3.9%, 4.8%, 9.3%, and 4.9%. On top of poor past performance, we are also moving into September with a significant amount of good news already priced into the market as well. So far, September has picked up where the others left off, with the S&P falling in each of the first four trading days of the month, dropping over 4%. Whether it continues to fall or quickly rebounds we don’t know, but one thing we know is that either way, we will not be surprised. Volatility is here, and all we can do is embrace it.
“The stock market has predicted 10 of the last 3 recessions” – predict it enough and eventually you will be right.
John Webb
Private Wealth Advisor
Pinnacle Asset Management
Raymond James Financial Services
Kidd Private Wealth Group
This market commentary is provided for information purposes only and is not a complete description of the securities, markets, or developments referred to in this material. Any opinions are those of the author and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of the total market capitalization of the Russell 3000 Index. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results.
