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Tag: Market Update

End-of-Summer Market Update

Speed bump, stop sign, or red light?  That’s the question investors are asking. 

Let us explain.  After cruising for the past five months, the markets screeched to a halt on September 3rd.  The Dow dropped over 800 points, and the Nasdaq plunged nearly 5%.1  All told, it was one of the worst trading days for stocks since the pandemic-driven panic of March.  The volatility continued the next day, albeit at lower levels. 

So, what does it mean?  Was Thursday’s selloff just a short-term blip – the equivalent of hitting a speed bump?  Or was it the beginning of a market correction?  If so, how long of a correction?  Are we merely coming to a stop sign, or will we hit a red light? 

Unfortunately, market signals are never as easy to interpret as road signs.  But as we start winding down this bewildering year, investors will be gripping their steering wheels ever more tightly.  That’s because they’re all trying to determine whether the markets will end the year on cruise control…or in full reverse. 

Whenever you drive to a destination, it’s always good to familiarize yourself with the road beforehand.  So, as this crazy summer draws to a close, let’s look at the different scenarios we could experience over the next few months.  As a heads up, we’re going to cover a lot of ground in this message.  We believe two of our most important responsibilities are to keep you informed about what’s going on in the markets and prepared for what may come in the future.  In this message, we will try to do both.  Let’s dive in!   

Speed Bumps

Between April and May, all three major US stock indexes — the Dow, the S&P 500, and the NASDAQ — climbed for five consecutive months.  The S&P 500, for example, rose 60% over that period.2

Every so often, though, the markets experience a dramatic one- or two-day selloff.  When those selloffs come during the middle of a major rally, like the one we’ve been experiencing, investors wonder whether it’s the beginning of a market correction.  (A correction, remember, is when the markets fall at least 10% from their recent high.)

Market corrections are relatively common.  On average, we’ll see one at least once every 1 to 2 years.3  But more often, these selloffs are not the beginning of anything at all.  They are simply speed bumps, and while they may seem random, there are usually underlying reasons for them.

For example, let’s take what happened on September 3rd and assume it’s only a speed bump.  Why did it happen?  A closer look at which stocks fell may provide some answers.  Specifically, tech stocks, including big names like Apple and Facebook, were the ones that suffered the most – just as those same stocks have largely fueled the markets rally.  (More on this in a moment.)  There are a few possible reasons for this.  One is that many investors may simply have been cashing out of tech stocks to realize their gains.  Another reason is that, because prices for tech stocks have risen so high, many traders may feel there’s simply no justification for plowing more money to them.  When that happens, traders and short-term investors often move their money into other sectors they feel are undervalued. 

In other words, the shudder that went through the markets is like the one you feel when changing gears in an old car.  If that’s the case, the selloff was likely just a speed bump.  A short pause for investors to take a breath before the markets resume their climb.

Here’s another reason why many selloffs are just speed bumps: The Federal Reserve.  After the country went into lockdown, the Federal Reserve did many things to prop the economy.4  First, they lowered interest rates to historic lows.  This was to lower the cost of borrowing on mortgages, auto loans, home equity loans, and others — a key step to keep the economy moving.  Second, the Fed launched a massive bond-buying program.  This is another way to keep interest rates low.  The Fed has also been lending money to securities firms, banks, major employers, and some small businesses using a variety of means.

These are all familiar tactics for anyone who was paying attention during the Great Recession.  Then, as now, the Fed’s actions indirectly propelled the stock market.  That’s because lower interest rates prompt increased spending, which in turn causes stock prices to rise. 

As long as the Fed keeps its stimulus programs in place, stocks will continue to be one of the most attractive places for people to put their money.  And since the economy remains on very shaky ground, it’s unlikely the Fed will pull back any time soon.  “Don’t fight the Fed,” investors are often counseled.  Thanks in large part to the Federal Reserve, the stock market continues to be the shortest, surest road for investors to travel.  That’s why many selloffs are nothing more than speed bumps. 

Stop Signs

Of course, sometimes a selloff is more than just a speed bump.  Sometimes, it’s like a neon light flashing: stop sign ahead. 

When this happens, Wall Street-types like to call it a market correction – a decline of 10% or more from a recent highThere are many reasons why corrections occur.  One thing many corrections have in common, though, is they come after months of major market growth.  When prices rise extremely high, extremely fast, it’s as if the markets have “overheated” and need to cool off. 

It wouldn’t be a surprise if that’s what we’re seeing right now.  Again, the S&P 500 rose 60% between March 23rd (its most recent low) and September 2nd (its most recent high).2  In that same period, the tech-heavy NASDAQ rose roughly 75%!5  Those are staggering numbers.  One could argue we’re overdue for a correction. 

Speaking of tech-heavy, let’s talk about technology stocks for a moment.  When the markets plummeted in March, these stocks were one of the few safe havens around – and they’ve also been the best performers since then.  That’s no surprise.  At a time when most Americans were largely confined to their homes, it was our technology – from our iPhones to Zoom, from Google to Netflix – that kept us entertained and connected.  But remember how we said the S&P rose 60%?  Peek under the hood and you’ll see those numbers were driven by two sectors: technology stocks and consumer discretionary stocks.  (Think Nike, McDonald’s, Home Depot, etc.)  Other sectors either performed much lower or are still in the red.  So, when we say the markets have recovered well, what we’re really saying is that the top sectors have performed enough to make up for those still struggling.

It’s one of the many reasons the stock market simply isn’t a reliable barometer for the overall economy. 

What does this have to do with a market correction?  A lot, actually!  It’s all thanks to these two terms: capitalization and weighting.  Remember, the S&P 500 is an index, not the actual stock market itself.  It’s essentially a collection of the five hundred largest companies listed on U.S. stock exchanges, which is where stocks are traded.  More specifically, the S&P is a capitalization-weighted index.  Without getting too technical, that means the largest companies make up the largest percentage of the index.  For example, Amazon, Apple, Microsoft, Facebook, and Google – just five companies – make up 20% of the index!6  

Look at that list of companies again.  Notice anything about it?  Yep, you guessed it: four of them are tech companies.  In fact, if we break down the S&P 500 by sector, you’d notice that technology dominates the S&P 500.  Actually, let’s do that right now!7

SectorWeighting
Information Technology27.47%
Health Care14.63%
Consumer Discretionary10.83%
Communications10.78%
Financials10.09%
Industrials7.99%
Consumer Staples6.97%
Utilities3.07%
Real Estate2.84%
Energy2.82%
Materials2.52%


As you can see, the S&P 500 is currently overweighted to technology stocks, to the tune of 27.4%!  So, if tech stocks were to endure any type of prolonged selloff, that would have a major impact on the S&P 500 as a whole – and could well lead to an overall market correction.      

Red Lights

Some market corrections only last a few days or weeks.  When that happens, it’s like coming to a stop sign.  A brief pause, and then we continue our journey. 

But some corrections last longer than that.  According to one report, the average correction lasts around four months.  When that happens, it’s more like hitting one of those annoyingly-long red lights, just as you’re heading home and the sun is in your eyes.  The kind that makes you think, “What does the universe have against me today!?” 

Before we go on, note that we’re not predicting that is what’s happening here.  We don’t try to predict the future – that’s a game for fortune-tellers.  Instead, we try to prepare for the future.  And to be frank, it’s possible we could see a longer correction in the not-to-distant future.  That’s because the future contains a lot of question marks, any of which could prompt the markets to pull back. 

For starters, there’s the economy.  While the markets enjoyed a V-shaped recovery after March, the overall economy has not.  Things are improving, but still a long way from healthy.  For example, the U.S. added 1.4 million jobs in August alone…but it’s still down 11.5 million jobs since the pandemic began.8  In other words, things are much less bad than before – but they’re still historically bad.  The markets have hummed along despite all this, but at some point, it’s possible the economic reality could drag stock prices down. 

At the same time, we’re seeing renewed Trade War fears with China.  We’re also only two months away from a bitter presidential election.  Historically, the markets don’t really care who sits in the White House, so there’s no reason you should let the election impact your financial thinking.  (We’ll have more information on this in the coming weeks.)  But in the runup to the election, we can certainly anticipate more volatility as people worry about who will win and what it means.

And of course, there’s COVID-19.  We’re all sick of hearing about it, but it’s still a fact of life and will continue to be so for some time.  Should cases surge in tandem with the upcoming flu season, the markets may retract into their shell.

In short, it’s certainly possible that we see a market correction over the next few months.  But whether we do or not, it’s important to remember that corrections are inevitable and temporary.  Corrections can even create opportunities for the future, as they open the door for investors to pick good companies at lower prices.

So, what do we do now?

Remember: We can’t predict the future.  But we can prepare for it.             

The fact is, we’re on a road we’ve never been on before – as investors and as a country.  In real life, whenever we drive on an unfamiliar road, we drive cautiously, keeping our eye out for hazards.  The same is true with investing.  Speed bumps are only an annoyance when we go over them too fast.  Stop signs and red lights are only dangerous when we speed past them.  That’s why we use technical analysis to determine which the way the markets are trending.  By doing that, we can spot these roadblocks ahead of time and slow down (or pull off to the side of the road) accordingly. 

Unlike buy-and-hold investors, we don’t need to fear the occasional bout of market volatility.  Because we follow set rules for when to enter and exit the markets, we don’t mind stopping occasionally.  We are prepared to play defense or even move to cash at any time.  That’s what helped us when the markets crashed in March.  It’s what will help us moving forward. 

Should a downturn happen, our clients’ portfolios are prepared.  Now we just need to prepare ourselves mentally and emotionally in case there are stop signs and red lights ahead.  And if it turns out to be a speed bump?  That’s fine, too.  We were already driving the speed limit. 

As always, our team will keep a close eye on the road ahead.  In the meantime, enjoy the end of your summer!  Please feel free to contact us if you ever have any questions or concerns.  We are delighted to be of service in any way we can.       

SOURCES

1 “Dow and Nasdaq plummet in the worst day since June,” CNN Business, September 3, 2020.  https://www.cnn.com/2020/09/03/investing/nasdaq-selloff-stock-market-today/index.html

2 “S&P 500 Historical Prices,” The Wall Street Journal, https://www.wsj.com/market-data/quotes/index/SPX/historical-prices

3 “Here’s how long stock market corrections last,” CNBC, February 27, 2020.  https://www.cnbc.com/2020/02/27/heres-how-long-stock-market-corrections-last-and-how-bad-they-can-get.html

4 “What’s the Fed doing in response to the COVID-19 crisis?”  Brookings, July 17, 2020.  https://www.brookings.edu/research/fed-response-to-covid19/

5 “Nasdaq historical prices,” The Wall Street Journal, https://www.wsj.com/market-data/quotes/index/COMP/historical-prices

6 “5 companies now make up 20% of the S&P 500,” Markets Insider, April 27, 2020.  https://markets.businessinsider.com/news/stocks/sp500-concentration-large-cap-bad-sign-future-returns-effect-market-2020-4-1029133505#

7 “U.S. Stock Market Sector Weightings,” Siblis Research, June 30, 2020.  https://siblisresearch.com/data/sp-500-sector-weightings/

8 “U.S. adds 1.4 million jobs in August,” CNN Business, September 4, 2020.  https://www.cnn.com/2020/09/04/economy/jobs-report-august-2020/index.html

Summer Market Update

Our thoughts on investing amid the current market situation

Every year around this time, parents, grandparents, and guardians prepare for Back to School season.  This year is no different – except how they prepare may be very different indeed.  Due to the pandemic, parents now have some difficult choices to make.  Do they send their children back to school?  Do they choose online learning?  Should they homeschool for a year?  It’s a difficult question with no easy answer because there are so many factors to consider.  How many cases are in the area?  What options does the school actually provide?  What is the child’s health like?  What about the health of other family members?  How do parents balance their child’s education, social needs, and health with their other responsibilities? 

Since the headline at the top of this letter says, “Summer Market Update,” you’re probably wondering why we’re talking about going back to school.  The reason is simple.  As you know, COVID-19 has completely upended our daily lives.  It has disrupted almost everything we used to think was “normal.”  And the problem is, there’s no playbook for how to adapt!  No cheat sheet that contains all the answers.  That’s certainly true for parents. 

It’s also true for investors. 

We’ve been thinking about this a lot as we’ve studied the markets over the past few months.  There’s simply no cheat sheet – or even a roadmap – for how to invest in a period like this.  Think about it.  Even during “normal” times, it’s hard enough for institutions to know what to do.  But asking an investor who’s simply trying to save for retirement to navigate the markets during a recession and a health crisis?  Talk about dealing with uncertainty – the one thing investors hate most! 

Just as parents have multiple options to consider, so do investors.  Be aggressive?  Be conservative?  Stay the course?  Get out of the markets altogether?  And again, there are so many factors and variables to consider – or at least, that’s what media pundits would have you believe.  So many, in fact, that trying to parse what matters and what doesn’t can feel like the world’s worst word search.   

For instance, check out this jumble:

Those words are earnings, interest rates, COVID, second wave, vaccines, stimulus, China, oil, and elections if you don’t want to bother searching – and who could blame you?  If you believe the talking heads in the media, each of those words could signal either a glorious market recovery or a gloomy market pullback.  As a result, interpreting the markets can feel like looking at a blurry photograph and trying to guess what it shows.  That just leads to less clarity and more confusion.  Is the economy recovering, or is it still in decline?  Are the markets on solid ground, or the edge of a cliff? 

The proof of all this can be found in how the markets have behaved over the past two months.  March’s bear market led to a sharp recovery, but since the beginning of June, the markets have been largely flat.  For example, on June 8th, the S&P 500 closed at 3,232.  On July 30, it closed at 3,246.1  There have been plenty of little bumps and shallow dips since then, but overall?  Flat.  And that’s with many investors staying out of the stock market altogether, with “nearly $5 trillion parked in money markets” as CNBC reported back in June.2 

In school, we learned that for every action, there is an equal and opposite reaction.  That’s Newton’s Third Law of Motion, and when he wrote it, he was talking about physics.  But lately, it can also describe the physics of the markets.  For example, here’s a short list of what’s been driving the markets lately:

EventMarket Action/Reaction
Good news about vaccine development!
But a rising number of COVID cases…
Unemployment claims fall!
But unemployment is still high…
Consumer spending is up!
But the stimulus that drove it is all used up
Federal Reserve keeps interest rates near zero!
Congress can’t agree on more stimulus

You get the idea.  For every bit of good news, there’s news that’s equally troubling.  For every action, there is a reaction. 

In short, there is still a lot of uncertainty out there about what type of economic recovery we’re actually experiencing, and where the markets will go next.  When you talk to investors and analysts, there’s a sense that most of them are just waiting for a sign.  For a development.  For something that’s infallible, incontrovertible, unmistakable.  Something that helps them feel certain about what to do.  Essentially, investors are tired of trying to read tea leaves and want road signs. 

But even during normal times – there’s that word “normal” again – the road to growth is rarely straight.  There is, and will continue to be, major uncertainty in the months ahead.  We don’t know what the coronavirus will do.  We don’t know when a vaccine will be available.  We don’t know whether the economy is recovering or stalling.  We don’t know who the next U.S. president will be.  We can have educated expectations, but we don’t know. 

So, what do we do?

We have good news: We don’t need to know all those things. 

You see, those who invest based on COVID vaccine rumors, economic forecasts, or even company earnings projections, are investing based on storylines.  But here Minich MacGregor Wealth Management, we try to be more like Sir Isaac Newton by observing laws – specifically, the law of supply and demand.  Amid a sea of economic uncertainty, supply and demand is the only reliable dry land.    

Again, nobody knows exactly when a vaccine will be ready, or what the coronavirus will do, or when Congress will pass more stimulus.  What we do know is that when supply outpaces demand, and sellers dominate the market, it’s time to play defense.  When the opposite is true, we play offense.  That helps us avoid the worst market downturns, which are the number one detriment to saving for retirement.  Investors who simply “buy and hold”, however, will have to weather every dip and bump, only to end up right back where they started.  Just like the markets have these past two months. 

When it comes to investing during this climate, we also must remember that, just as there’s no cheat sheet, there’s also no one right answer.  Just as parents must make the best decision for their situation, the same is true for us.  When it comes to our investment strategy, making sense of the word search above is simply not as important as asking ourselves: How much risk can we afford to take on?  What kind of return do your personal goals require?  How close are you to retirement?  Do we prioritize growing your money, or preserving it?  We’ll continue to let your answers dictate the decisions we do make, not how many COVID cases there are or when a vaccine will come.  That way, even when the market is flat, we’ll keep moving forward – secure in the knowledge that we’re doing what’s best for you. 

In the meantime, the markets will continue to act and react.  There will be good weeks and bad days.  That’s why, when it comes to interpreting the markets, we don’t have to worry about predicting the future, or solving metaphorical word searches to figure out what matters.  We just need to continue following the rules we’ve put in place: Getting in the markets when they trend above a certain point and getting out when they trend below a certain point. 

We hope you found this to be informative.  As always, please let us know if you have any questions or concerns.  We always love to speak with you.  Have a great rest of your summer!     

1 “S&P 500 historical prices,” The Wall Street Journal, https://www.wsj.com/market-data/quotes/index/SPX/historical-prices

2 “There’s nearly $5 trillion parked in money markets as many investors are still afraid of stocks,” CNBC, https://www.cnbc.com/2020/06/22/theres-nearly-5-trillion-parked-in-money-markets-as-many-investors-are-still-afraid-of-stocks.html