Wrought Market Update for August 8

Sentiment shifts have been large and inconsistent

Recent stock market sentiment shifts have been both large in size and very inconsistent. Let’s go back to July 1 and the market is heavily focused on artificial intelligence related large capitalization growth stocks. These stocks were largely responsible for driving the overall market higher and let's say this led to, not extreme, but stretched positioning for some investors. Then later in July the market narrative begins to shift again. The Federal Reserve messages that they want to cut interest rates in September and so the most volatile and risky segment of stocks in the market start to take off.

Then, last week, with just a few limited data points (a weaker than expected jobs report in the US and just the suggestion of interest rate hikes in Japan) market sentiment shifted again! Recession fears were triggered and global risk off sentiment ensued. It did get a bit intense internationally with Japan’s stock market dropping about 20%, its biggest three-day rout ever, but has since rebounded about half way. U.S. stocks slid too but have been trimming losses throughout the week. This many sentiment shifts in such a short period of time based on so little data just doesn't make sense.

The correction is much more technical than fundamental

This correction is much more technical than fundamental and is being driven by overleveraged investors having to sell rather than changes in the economy and companies’ financials. We think the July U.S. jobs report is more in line with our view of a soft landing and an economy that is slowing in a healthy way than a recession. The unemployment rate has been rising, but not because workers are being laid off but because more people are joining the labor force and are looking for jobs. This is positive for the economy! Consumer spending, while cooling, remains relatively healthy and Q2 corporate earnings topped expectations, with S&P 500 earnings growing 12% year over year, even higher than the 9% growth that was expected at the start of the quarter.

The baby thrown out with the bathwater

So we’re doing what you’d expect us to be doing and we're looking for cases where the baby has been thrown out with the bathwater. Whenever there are big market moves like this, you’ll find investments at prices that just don't make sense and that presents us with buying opportunities.

Recent volatility in equity markets is normal

To take a long term perspective, recent volatility is just what happens sometimes in equity markets. Corrections and sentiment shifts like this are not uncommon.  At least every other year there's a down draft of 10% or more in the market. And if you go all the way back to the 30s, the median drawdown in any given year is 13% and we haven't gotten to that level. So from a historical perspective, this is nothing unusual really. 

Time in the market is way more important than timing the market

Our final thought is the importance of not trying to time the market, but rather the importance of time in the market. We went back and thought about the last 50 years of investing. Over that time, we had a president resign, we had a collapse of the nifty 50, we had stagflation in the 70s, we had the 1987 stock market crash, the rise and fall of the dot-com bubble, two wars in Iraq, one in Afghanistan, a global financial crisis, a once in a hundred year pandemic, And guess what? If you had invested $5,000 50 years ago it would be worth $1.3 million dollars today. Recent events will also look like a blip when we look back.

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. This material may contain estimates and forward-looking statements, which may include forecasts and do not represent a guarantee of future performance. This information is not intended to be complete or exhaustive and no representations or warranties, either express or implied, are made regarding the accuracy or completeness of the information contained herein. The opinions expressed are as of August 8, 2024 and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. ©2024 Wrought Advisors LLC