July was eighth positive month in the past nine, but this was quickly forgotten as there was a market selloff to begin August. The primary catalyst was on the 2nd when there was a weaker-than-expected employment report, which ignited concern that the U.S. economy could tip into recession. Several additional factors contributed to the selling pressure:
So, what now? First, this is not the time to panic. Remember, pullbacks and corrections — while not fun — are a normal part of investing. Think of them as tolls to pay on the road to attractive long-term returns. The S&P 500 and its predecessor indexes have gained 11.5% annualized since 1950, through some of the worst wars, terrorist attacks, recessions, financial crises, pandemics, and natural disasters in history. And that’s while averaging a drawdown of over 10% per year – even in up years. Turning to potential catalysts for a rebound, perhaps the most obvious one is the Federal Reserve (Fed). A 0.5% rate cut in September is now firmly on the table, and an emergency, intra-meeting cut, though unlikely, is possible if the economy weakens further. Simply put, restrictive monetary policy is no longer necessary. Expect the Fed to quickly get to a neutral stance, despite the perception that they might influence the election. “Higher for longer” created room for cuts. Other drivers that could help turn stocks around include better economic data, reassuring commentary from corporate America, and more progress unwinding leveraged trades. Fundamentals still look good enough to keep this bull market going even as the economy slows into the election. Additional downside may be modest, and opportunities may soon emerge, but bottoming is a process. Be patient and allocate wisely. As always, please let me know if there is anything that I can do for you or someone that you care about. Sincerely, Ed |
August 2024 Client Letter
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August 07, 2024