The markets finished last week clearly rattled by a combination of a weaker labor market and corporate tech earnings missing Wall Street expectations. The economy is clearly slowing and the unexpected rise in the unemployment rate was a major catalyst in the current stock market pullback.
As of 8/5/2024, here is a snapshot of the main stock and bond categories:
Stocks:
S&P 500: 9%
Nasdaq: 8% (in correction with 10% drop from intra-year high)
Russell 2000: 0.6%
International Developed: 0.08%
Emerging Markets: 1.84%
Bonds:
Aggregate Bond Index: 1%
Long Term Treasuries: -0.12%
Short Term Aggregate: 1.3%
Both inflation and economic growth are decelerating. Consumer prices declined 0.1% in June, the largest drop for any month since the early days of COVID. Much of this was due to a decline in energy prices, but even “core” consumer prices were soft, up only 0.1% for the month, the smallest increase for any month in more than three years. The CPI was still up 3.0% in June versus the year prior, but this year-ago comparison looks like it decelerated in July and will probably do so again in August, given that oil prices are down.
Last month we spoke about how the volatility index was exceptionally low all year and how this was likely going to be different in the latter half of this year. So far we are seeing that pick up with an extreme acceleration in the last few trading days.
There is similar action in the Fed Futures market where traders are betting that rates could now fall as much as 125 basis points or 1.25% by the end of 2024. Bonds have performed very well in the last few trading days providing a buffer against the stock market volatility. We see this continuing if the market is correct and rates fall this year.
The financial media is going to be loud this week with Recession being back on everyones mind. For this reason we wanted to share some historical information on past recessions to put things in perspective.
What you can see here is previous recessionary environments going back to the 1950s, and how severe the contraction was in the S&P 500 and then the subsequent returns in the next 1, 3 and 5 years. Important to note, our equity portfolios are much more diversified (with uncorrelated assets) than the S&P 500 so our drawdown would be less than what’s pictured here. If you expand even further to 10 years, the upside numbers become even greater as shown below.
So while the volatility here in the short term will likely remain elevated, we remain optimistic with the outlook going forward in both bonds and stocks.
We will continue to look for value where we can and adjust things within the portfolios as needed.