Staying Resilient During Market Turmoil

A confluence of risks cascaded into a waterfall over the past week, which led to a very sharp pullback in the stock market on Monday.

This surprise volatility isn't out of the ordinary.

The stock market and its investors have a well-documented history of shooting first and asking questions later, but the key to long-term success in the market is usually by playing dead rather than making an emotionally-fueled decision in the throws of a volatility event.

And it's a lot easier to play dead when you know exactly what's happening.

So here it goes, in no particular order (pardon the jargon):

• The July jobs report released last week showed a surprise cooldown in job growth at 114,000 vs expectations for 175,000.
  

• The surprise slowdown in jobs growth came just a couple days after the Federal Reserve decided to not cut interest rates.
  

• This is leading investors to believe that the Fed is offsides and that an economic slowdown is approaching.
  

• Warren Buffett's Berkshire Hathaway revealed in its earnings over the weekend that it cut its massive Apple stake in half during the second-quarter. Buffett is highly regarded, so when he makes big moves, investors pay attention. It's worth noting that Berkshire still owns a massive $80+ billion position in the iPhone maker.
  

• Iran issued a threat that it plans to attack Israel after the country killed a Hamas leader in Tehran. The stock market hates geopolitical volatility and wants to see tensions in the Middle East cool down, not ratchet up.  
  

• Japan's central bank issued a surprise interest rate hike last week. This led to a sharp unwind of the Yen carry trade. That's when investors borrow Yen at a low interest rate and reinvest it in higher yielding assets like US Treasurys, and collect the difference.
  

• But with Japan's central bank raising interest rates and the Federal Reserve set to cut interest rates, the Yen carry trade is quickly unwinding.
  

• Finally, VP Kamala Harris has been rising in the polls recently, which is leading to expectations of a tight Presidential election in November (betting markets currently put it at a coin flip).
  

• On the surface, the stock market typically welcomes less regulation and lower taxes, which is now in question if Harris is wins in November.

All of the above factors, some more influential than others, reminds me of an amazing chart from Michael Batnick of Ritholtz Wealth Management.

"There's always a reason to sell."

Yet, if you ignored those reasons and stayed the course despite wars and pandemics and recessions, you turned out to be the winner. 

This is not to dismiss the fact that it is incredibly scary and painful to see your investment accounts decline during these periods of volatility.

But there are good reasons to believe that, yet again, this too shall pass.

Consider the following (pardon the jargon):

• The stock market is historically seasonally weak starting in the second half of July and through October during a Presidential election year. In other words, this stock market decline is right on schedule.
  

• The US economy is still adding jobs. We have yet to see a monthly jobs report that showed net firings. We are still in net hiring territory, and that's great news for consumers.
  

• If there is an economic cool down, with inflation mostly tamed, the Federal Reserve has plenty of levers to pull to help stimulate the economy.
  

• The Fed can cut interest rates significantly, and lower interest rate would help stimulate the economy by unfreezing the housing market.
  

• The Fed could also stop rolling bonds off of its balance sheets, which would lower long-term interest rates, further acting as a stimulus for the economy.
  

• Remember, lower interest rates helps stimulate consumption as consumers would face lower mortgage payments, auto payments, credit card payments etc.
  

• The US unemployment rate has risen from a cycle-low of 3.4% in January 2023 to 4.3% today. But the average unemployment rate since 1948 is 5.7%, and much of the rise in unemployment rate over the past year is due to increased labor supply, not decreased labor demand.
  

• There are technological revolutions still in the first inning, from artificial intelligence to GLP-1 weight loss drugs. These technologies will help boost economic productivity for years, if not decades, to come. 
  

• Bonds are finally working. The bear market of 2022 was especially painful because both bonds and stocks went lower at the same time. But with interest rates falling, bond prices are rising, meaning that a good chunk of your portfolio, if you own bonds, is blunting the pain in stocks over the past week. 
  

• The US consumer is very healthy from a financial perspective and is sitting on more than $6 trillion in money market funds that could serve as buying power for the stock market as lower interest rates make cash less appealing.
  

• Corporate profits are still rising, with second-quarter earnings results yet again delivering solid growth. If corporate earnings are still rising, so to should stock prices in the long run.
  

• Despite the S&P 500 being down 8% from its record high in July, it is still up 9% year-to-date. The stock market on average experiences an intra-year decline of 14% (see chart below), so this decline is completely normal, and even healthy as it resets valuations to a more attractive level for new money to be invested.

Technically Speaking

From a technical perspective, this appears to be a healthy correction for the S&P 500.

There is strong support for the index at around the 5,000 level, marked by its rising 200-day moving average, which served as a reliable support level in March 2023 and October 2023.

The 5,000 level also served as support during the April decline earlier this year.

A further decline to the 5,000 level would represent another 4% downside from current levels.

So, there could still be some more downside, but I would look at that as a strong opportunity to put money to work.

Remember the adage from market veteran Walter Deemer: "When the time comes to buy, you won't want to."

One last reminder

The financial media makes money from getting clicks. The more clicks they get, the more advertising money they receive. And they get more clicks by writing scary headlines, especially during market declines.

Their incentives are typically not aligned with your long-term interests. Limiting your consumption of news on days like today can go a long way in preserving the health of your overall investor psychology. 

Thank You For Reading! 🙏

As always, thank you for your continued trust in Ithaca Wealth Management. It’s a privilege for me to help guide you on your financial journey. Please reach out if you've experienced any major life changes recently of if you have questions about anything related to your investment portfolio or financial plan.

If today's stock market volatility is of major concern to you, do not hesitate to give me a call or text anytime at (607) 882-1434 or e-mail [email protected].

 Sincerely,
Matthew Fox