Relative changes are tough for the human mind to process. Having the first 60-degree day after a steamy summer feels so chilly that we reach for jeans and a coat. However, that same 60-degree day after a freezing winter feels so warm that we’re eager to throw on short sleeves and shorts. That’s what this market feels like to us right now. It was only two weeks ago (July 24th) that the S&P 500 saw its first 2% down day in 356 days, which we think is pretty impressive considering the persistent concerns about inflation, interest rates, and the subsequent economic impact. Then we had some very meaningful follow through of that volatility thanks to a trifecta of events. First, the Bank of Japan surprised investors by raising interest rates for the first time in 17 years. A couple of days later, there was a weak US jobs report that caused investors to price in even more Fed rate cuts. As the difference between future Japanese and US interest rates widened, the Yen strengthened sharply, causing a rapid unwind of a levered trade that’s been a staple since the late 1990s. The CBOE volatility index, appropriately called the “fear gauge”, spiked sharply on Monday, and global stocks plunged.
The bad news is that this volatility is probably not over. However, history shows that it’s unlikely to last very long.
Typically, there are aftershocks after a big volatility spike. This occurs for many reasons. It can take time to clear bad trades from the system. It also takes time for skittish investors to realize that the volatility isn’t a sign of worse things to come. According to analysis from the Wall Street Journal (WSJ), there is usually a second selloff in the following 30 days after large volatility spikes. Technical traders call this a “retest”.
However, such sharp selloffs tend to be short lived. According to the WSJ article, it usually takes between 40 and 50 days after a volatility spike to begin a durable recovery. Considering that market turbulence usually runs high in September and October, and this is a Presidential election year, this timeline makes a lot of sense to us.
After nearly a year of hardly any volatility, the S&P 500 dropped 8.5% in just 14 days. However, corporate earnings remain strong, the Fed’s next move is likely a cut, and artificial intelligence investment remains robust. We still think we’re in the early innings of a recovery that can fuel a multi-year bull market that will begin to broaden.
As we noted last week, there are many types of investors in the market. We didn’t anticipate an unwind of the Japanese carry trade, but it’s just another example of not letting others dictate your financial plan and investment time horizon.
The opinions expressed are those of Harrison Financial Services as of August 7, 2024 and are subject to change. There is no guarantee that any forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment or security. Please remember that all investments carry some level of risk, including the potential loss of principal invested. Indexes and/or benchmarks are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance and are not indicative of any specific investment.