While many people were wrapping up summer by traveling to their favorite vacation destinations, the stock market rally also decided to take a vacation.
From July 16th to August 7th the S&P 500 dropped over 8% and the more tech-heavy Nasdaq 100 index dropped over 13%.
It caused the media pundits over on CNBC (The Constantly Negative Business Channel) to come out of their summer hibernation with their typical “market crash” headlines.
MASSIVE SELL OFF OR A NORMAL CORRECTION?
On the worst day of the sell-off, there were several news articles about the “MASSIVE” market sell-off.
One of things we always try to do is put stock market sell offs in perspective from both a historical standpoint and also attempt to look at what the current corporate earnings and economic data are telling us.
From a historical perspective, the July/August sell-off was completely normal. About 94% of years have at least a 5% intra year drawdown on the stock market, and about 64% have at least a 10% draw down.
As we can see from this graphic below intra year drawdowns are very common, and it’s actually much LESS common for us to not have a drawdown. Going back 30 years to 1994, there have only been two years, 1995 and 2017, where we haven’t had at least a 5% intra year market correction.
However, in most years the market still finished positive for the year on a total return basis even after these intra-year declines.
“THIS TIME MUST BE DIFFERENT”
As we mention so often, it is always easy to say “this time might be different” when it comes to investing and try to find reasons why the market is selling off.
In this particular case the three primary reasons that were being given by market pundits for the sell-off were:
- A weak labor market report
- The rapid unwinding of the Japanese Yen carry trade
- Some disappointment that the Federal Reserve didn’t cut interest rates at their July meeting
This cocktail of reasons, caused a short lived market panic. The VIX index which measures market volatility and is sometimes called the “fear index”, temporarily spiked up to levels that have typically only been seen in periods of severe economic distress.
*Source: CBOE VIX 3-Month Index
As this spike in volatility and fear was happening, we had to take a step-back and say what are the earnings and economic data actually telling us.
WHAT WAS THE DATA SAYING?
When we looked at the data, although there were some signs of weaker earnings forecast in certain sectors and slowing economic growth in some reports, overall the data was saying this was no more than a panic sell off.
According Earnings Scorecard data from FactSet: For Q2 2024 (with 93% of S&P 500 companies reporting actual results), 79% of S&P 500 companies have reported a positive EPS surprise and 60% of S&P 500 companies have reported a positive revenue surprise.
This tells us overall corporate earnings have still been very strong.
On the economic data front, home prices remain at or near all time highs, layoffs remain at all time lows, consumer spending remains strong, and household debt as a percentage of income remains low compared to other countries and historical averages. This is all signals that consumers have the capacity to continue spending, which is ultimately the biggest driver of GDP and company earnings growth.
THE ROUND TRIP
As we sit here today (August 29th), some recent positive economic reports, along with the forecast that the Federal Reserve is going to start cutting interest rates at their September meeting has driven markets into a quick V-shaped recovery back to or near all-time highs.
While we continue to think a handful of companies in the AI and technology space may be trading a high valuations, many other parts of the market seem to be trading at reasonable valuations when viewed historically.
We continue to believe earnings growth driven by consumers will be the most important thing to keep an eye on for the markets, even as we are heading into the election which will likely dominate the headlines.
As always, if you ever see a concerning piece of news regarding the financial markets, we would love to be a resource to help provide you some additional context.
As we know, there is often be a wide divide between what the news is saying and what is actually going on. The news is designed to drive clicks and not maximize long term investment results!
