Rocky Markets: 8 Things to Know
Key takeaways
● The current rout may not spell the end of the bull market—though the jobs market is slowing down.
● On the plus side, the S&P 500 index remains in an undeniable uptrend, with the majority of stocks above their 200-day moving average.
● The earnings picture continues to improve, notwithstanding a few visible misses this week. Q2 earnings growth is now up to 12%.
● Remember, the odds of a 5% correction are 64%. The market has gone up 60%–70% of the time by an average of 10% per year,1 but that return comes at a price, in the name of volatility.
● Stay diversified, and this too shall pass.
A double whammy hit the market last week: a disappointing Purchasing Manager’s Index (PMI) on Thursday followed by a weaker-than-expected jobs report on Friday, sending the S&P 500 index down 6.5% from its recent all-time high as of August 2.
The CBOE Market Volatility Index (VIX) has surged from calm to near-panic levels almost overnight. Unlike past market jitters caused by concerns over rising interest rates, this spike is driven by recession fears and the market’s internal rotation.
Here are 8 key takeaways from this week’s market moves.
Bull Market and Jobs: Is the bull market ending, and is a long-feared recession now imminent with the jobless rate hitting 4.3%? I don’t think so. The job market is slowing, as shown by the JOLTS report and Friday’s employment data, but I see this more as a correction of COVID-era excesses rather than the start of a downturn.
Interest Rate Cuts: The weak jobs report has led the market to expect more rate cuts this year and next. The forward curve has shifted from 3.5% (indicating 7 cuts) to 3.0% (9 cuts), with the market now pricing in 3 rate cuts this year.
Bond Market Reaction: The bond market responded similarly, with the mid-curve yields dropping significantly. The 5-year yield is now at 3.58%, and the 5-year TIPS yield has dropped to 1.76%.
The 10-year yield has returned to levels seen earlier this year when similar Fed expectations were in play. The market was premature back then, and it seems to be overreacting again, not so much in timing but in the expected scale of the cuts.
The Dollar: This week’s decline in yields also pulled the dollar down, highlighting that interest rate differentials still impact currencies. The weaker dollar suggests this isn’t a liquidity crisis.
Volatility: Remember, there’s a 64% chance of a 5% correction. The market historically rises 60%–70% of the time, averaging a 10% gain per year, but that return comes with volatility. It’s crucial to keep a long-term perspective during turbulent times.
S&P 500: Despite the recent sharp rotation, the S&P 500 index remains in an uptrend, with most stocks trading above their 200-day moving averages.
Market Rotation: There's no denying some technical damage has occurred, evident in the Russell 2000’s rapid drop. This might signal a sideways market grind into the fall.
Earnings: Earnings continue to improve, despite a few high-profile misses. Q2 earnings growth has now reached 12%.
Fixed Income: Bonds are once again providing protection, at least for now, moving inversely to equities.
Overall, while we might face some extended market volatility, maintaining diversification should help weather the storm.
Sources:
Jurrien Timmer, Director of Global Macro for Fidelity Management & Research Company; Fidelity Viewpoints
https://www.fidelity.com/learning-center/trading-investing/august-stock-market
Disclosures:
This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.
This material is provided as a courtesy and for educational purposes only.
These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information
