No Time to Panic
Global equity markets took a nosedive last Friday after several economic data releases pointed to a broad slowdown in the economy. The pain continued into Monday, August 5, with the S&P 500 losing 3 percent, now 8.5 percent below its all-time high set on July 16, 2024.
What’s Causing the Volatility?
On Friday, the Bureau of Labor Statistics reported that the US unemployment rate rose to 4.3 percent in July and non-farm payroll growth was just 114,000, both below expectations. This confirmed fears of a weakening job market. Additionally, the Institute of Supply Management reported a drop in manufacturing employment to levels seen during the April-June 2020 COVID shutdown. Combined with the Federal Reserve’s decision to hold interest rates steady on Wednesday, markets feared that the Fed’s policies might have been too restrictive, potentially leading to a recession.
Are Recession Worries Founded?
While recent labor and manufacturing data indicate a slowing economy, they don't necessarily signal an imminent recession. US consumers, who drive 70 percent of economic growth, still have healthy balance sheets and rising real wages. Jobs are still being added, and corporate earnings are growing, albeit slower than expected. While a recession in 2024 is possible, it is far from certain.
The recent market volatility likely reflects overblown expectations for corporate profitability from artificial intelligence adoption. Shifting from peak enthusiasm to recession fears can cause significant short-term market movements. However, the strong rebound in the S&P 500 on August 6th (up nearly 2 percent as of noon ET) suggests that market sentiment may have shifted too far into negative territory.
Tech Stock Pullback -- An Unsurprising Phenomenon
At SageView, we have warned about the concentration in domestic stock markets around a few mega-cap technology companies for the past two years. AI enthusiasm propelled Nvidia’s stock up nearly 600 percent from January 2023 to June 2024, quickly surpassing even Microsoft, Apple, Alphabet, Meta, and Amazon to become the world’s most valuable company. By June 30, 2024, the top 10 stocks made up 36 percent of the S&P 500, with the top five representing over 27 percent. This concentration is unprecedented in the past 150 years.
Playing Defense in Client Portfolios
Due to these concerns, we took a conservative position in our Dynamic suite of portfolios in November 2023, reducing stock exposure in favor of bonds, which had already been hit hard by the Fed’s rate hikes and offered attractive yields. We also exited most high yield bond positions in favor of higher quality debt. While these positions have dragged on performance for much of 2024, they are now providing essential stability as markets fluctuate.
What Should Clients Do?
Today’s stock market rebound demonstrates that significant investment opportunities often arise when pessimism peaks. As an investor, avoiding the urge to sell during market lows is crucial, as big stock gains often follow big losses. This is where your advisor can help you maintain investing discipline amid scary headlines and market turbulence.
We suggest using this volatility as an opportunity to talk to your advisor about what has been driving the US stock market recently, mainly large-cap tech stocks. While investing heavily in the “Magnificent 7” has been successful recently, we want to ensure your portfolio is diversified and can thrive as market conditions change. Diversifying across asset classes and investment styles may not be exciting, but it is a proven strategy for long-term success. Rest assured, our investment team is closely monitoring market conditions and is ready to act on your behalf to protect against risks and capitalize on opportunities.