August 2024 Market Update - Volatility

August 6, 2024

Following a strong start to the year, markets have pulled back in recent weeks as volatility abruptly returned

Markets had been relatively stable going back to early-2023, led by a rally in AI-focused tech companies.

However, as these leading companies became overextended, markets experienced a major rotation with larger growth indices taking a breather. The Nasdaq is now firmly in correction territory, with the S&P 500 teetering on the verge.

Some softer than expected economic data last week, combined with rising political tensions and broader recession worries, created a scenario where stocks quickly retreated from their recent all-time-highs.

Market corrections can be unnerving, but it’s important to remember this is a normal part of investing. Going back to 1928, the S&P 500 has seen a 10% or larger correction in almost two-thirds of all years:

Even during up years, market corrections are normal. From 1928 through 2023, the S&P 500 finished positive in 70 of the 96 years (a 73% win rate). In half of those 70 positive years, so 35 times, there was a double-digit correction at some point during the year.

Taking it a step further, the S&P 500 finished up double-digits 56 times over that same period (58% of years). In those years with double-digit gains, there were 24 instances where markets experienced a 10% or worse correction, so almost half of the time.

Seeing markets go down at some point in the year isn’t abnormal, even when markets are trending up.

It’s also important to understand the current environment is much different than what we saw in 2022. Going into that downturn, inflation was on its way to multi-decade highs and interest rates were starting on the floor. This combination resulted in an “everything bear market” with stocks and bonds both turning lower.

This time around, inflation is trending back toward its long-term average and interest rates are starting at a much higher baseline, providing a better framework for a diversified portfolio to mitigate some of the volatility in the stock market.

Since the peak for the S&P 500 on July 16, here are the returns for various asset classes:

So despite the headlines, a balanced, diversified portfolio isn’t down nearly as much as what it might seem when watching the news.

A few important things to remember right now:

1. The S&P 500 just hit a fresh all-time-high 15 trading days ago.

2. Markets are still broadly positive year-to-date. The S&P 500 is up 9.53% for the year even AFTER this pullback.

3. Bonds are in a much better position to help hedge against downside risk in the stock market than they were back in 2022.

Market corrections aren’t enjoyable, but they are normal. It’s ok to feel nervous and anxious when events like this happen, that’s normal too. Just keep in mind, corrections turn into small speed bumps on the road to longer term growth over time:

Maybe this is the bottom and stocks rebound in the coming weeks, or maybe there’s still some further downside ahead. Either way, this too shall pass, just like all the other market corrections that have come (and gone) before.