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August 09, 2024 at 02:13 PM
What You Need to Know
- The recent rollercoaster gives advisors the chance to review investing fundamentals with clients.
- As long as people keep the swings in perspective, navigating volatility is manageable.
- Markets could drop leading into the presidential election, but that would present its own opportunities.
Equity market investors breathed a sigh of relief Thursday when Wall Street experienced its strongest daily gain since November 2022, with the S&P 500 rising 2.3% and the Nasdaq Composite adding 2.9%.
Analysts attributed the rally, which came after a series of dark days for investors, to a drop in U.S. unemployment claims that eased fears of an imminent economic slowdown. Just three days earlier, investors had been alarmed by a notable uptick in the unemployment rate and the decision by the U.S. Federal Reserve to hold interest rates steady at a two-decade high.
As markets held steady Friday, a number of market watchers offered timely advice for long-term investors, starting with volatility being a normal and healthy part of investing. As long as people keep the swings in perspective and avoid emotional trades, they argued, navigating volatility is achievable.
Profit-Taking and Price Swings
Among the week’s commenters was Jason Britton, president and chief investment officer of Reflection Asset Management.
“The sudden surge in volatility, at least at this juncture, is not concerning,” Britton said. “Sudden spikes are typically speculators piling on or unwinding positions, especially those that are leveraged.”
This seems to be what drove much of the week’s market moves, he noted.
“Many professional investors were heavily leveraged to the ‘yen carry trade,’ and when the [Central Bank of Japan] tightened recently, it sent investors running to cover positions,” Britton explained. “They covered by profit taking in the mega-cap tech trade.”
As Britton emphasized, most U.S. earnings reports for the second quarter have offered good news, “at least so far.” This should provide a stabilizing force as the markets await the Federal Reserve’s next move.
“The thing to watch for is sustained downward pressure on the indices — over the next two weeks,” Britton said.
‘Shift From Greed to Fear’
Samuel Wagner, the founder and chief financial guide at WealthGuides, offered a similar take, suggesting that the theme of the week was a “rapid shift from greed to fear.” This happens regularly in the normal course of market cycles, he said.
“Last week, the Department of Labor reported that unemployment had risen to 4.3%, marking a 0.6% rise since January,” Wagner observed. “That’s the fastest rise since the pandemic. In addition to that, Warren Buffet’s Berkshire Hathaway disclosed that it sold nearly 50% of its position in Apple in the second quarter.”
Such profit-taking is normal and healthy, Wagner noted, but it can spark short-term fears about what comes next, especially as economists suggest that a U.S. recession looks more likely than it did a week ago.
