Volatility Hits Post-pandemic High
Almost overnight, the stock market shifted from unbridled optimism to dour pessimism.
8.5.2024
Since July 10th, the S&P 500 is down about 8% and the Nasdaq is down 15%. Both indices are still solidly positive for 2024, but this is a stark reminder of financial markets’ erratic nature.
Risk Off
It’s impossible to draw accurate conclusions from short-term market moves but we’re seeing the most expensive stocks getting hit the hardest. There are two components of a company’s stock price: 1) the company’s earnings and 2) the multiple that investors are willing to pay for those earnings.
As we move through earnings season, company financials are okay. Earnings are growing strongly from last year and not much has changed fundamentally. Valuations, however, are compressing, as investors are unwilling to pay as high a price for those earnings as they were previously. This hits speculative investments with high valuations the hardest as investors seek out safer investments.
Reset-ssion?
For the past few months, we’ve seen key economic indicators slow down. This is not surprising as the economy normalizes after the post-pandemic boom. For example, unemployment is starting to climb from its historic lows in 2023.
So far, this is normal. If the economy continues to deteriorate, it could signal the start of a recession. Time will tell.
Of course, not all recessions are long and deep. Some are a quick, shallow reset. The Global Financial Crisis was a long, protracted recession because of significant imbalances related to housing and leverage. Today, we see signs of underlying strength in the US economy including reshoring of manufacturing and pent-up demand for housing and autos.
Federal Reserve
The Federal Reserve has a dual mandate: stable prices and maximum sustainable employment. With inflation almost under control and unemployment rising, the Fed is poised to shift gears.
Currently, the Fed targets a federal funds rate range of 5.25%-5.50%. The Fed is widely expected to cut rates by ¼ or ½ of a percent at their September meeting. Additional cuts could follow in November and December. By lowering the cost of financing, cuts could help stimulate economic activity. Cuts could also boost market sentiment.
Cobblestone’s Approach
Markets can be erratic over short time periods. Our goals-based investing framework accounts for this. By taking a comprehensive view of assets and carefully constructing portfolios, we can make sure short-term volatility doesn’t impact your needs.
Additionally, we are not wedded to a single asset class or investing style. We aim to build all-weather, durable portfolios with our multi-asset approach. When some parts of our portfolio zig (stocks), others will zag (bonds, alternatives). We remain focused on the long term.
As always, if you have any questions or would like to discuss your investing goals, please contact us.
We look forward to hearing from you.
Disclosure: Unless stated otherwise, views, opinions or forecasts expressed in this blog are those of the author and do not necessarily reflect those of the Adviser and/or its employees. The contents of this blog are distributed for informational purposes, and are not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Nothing in these communications is intended to be or should be construed as individualized investment advice. All content is of a general nature and solely for educational, informational, and illustrative purposes.