- One of the most volatile weeks in a while saw the S&P500 rally late in the week to finish flat for the week overall.
- This recent patch of volatility is really quite normal, even for good years for stocks.
- August is known for volatility and once again, it’s living up to its reputation.
- The late week rebound was supported by better economic data, including some good jobs-related numbers.
What a Week
What a week! If you were on vacation last week and didn’t pay attention then consider yourself lucky and just know the S&P 500 was flat on the week. But if you were here last week, it was anything but calm. We came into Monday morning with global markets crashing, led by Japan’s Nikkei, down more than 12% for the worst single day since the crash of 1987. We will keep things very simple here, but the Bank of Japan (BOJ) surprised markets with a rate hike which lead to a big move in the yen, which in turn unwound the yen “carry trade,” causing many risk assets to sell off heavily.
But as the week progressed things calmed down and better economic data showed fears of a recession were once again overblown. We saw both strong services data and a move lower in initial jobless claims, sparking the big late week rally. In the end, Monday was the worst day since September 2022, while Thursday was the best day since November 2022. But point to point, the S&P 500 ended the week almost exactly where it began.
Putting Things in Perspective
The S&P 500 had pulled back 8.5% from its mid-July peak before the late week rally. This was the second 5%+ mild pullback we’ve seen so far this year and it is important to remember most years see more than three of these on average, along with one 10%+ correction.
As scary as last week was, even the best years tend to see volatility and some scary headlines, so to think 2024 would be any different was probably foolish. Here’s a good chart showing that since 1980, the S&P 500 gained more than 10% per year on average, but has pulled back an average of 14.3% peak to trough intra-year as well. That puts the 11.5% rally and 8.5% pullback we’ve seen in 2024 in better perspective.
There’s Something About August
Yes, what we saw last week due to the yen carry trade unwinding wasn’t fun for investors, but it turns out August is the month we tend to see these types of out of the blue events more often than any other. So maybe this isn’t so odd?
Starting clear back in 1990 when Iraq invaded Kuwait, August seems to be susceptible to large geopolitical or market events taking place. In 1997 was saw a major Asian banking crisis. 1998 saw the Russian debt default. 2010 had a European banking crisis. In 2011 there was the US debt downgrade, and in 2015 China’s surprise devaluation of its currency. All of these events caused extreme fear and heightened volatility, but we got past them all. We don’t expect 2024 to be any different.
Markets Perked Up on Better Job Numbers
The August 2 jobs report already had markets primed for a potentially volatile week after job gains came in much weaker than expected and the unemployment rate ticked up to 4.3%. Markets seemed to find some reassurance on Thursday in the weekly data on new claims for unemployment. As you can see below, new claims had looked like it was potentially starting to spike a few weeks ago but has since settled down and Thursday’s number came in at 233,000, below expectations of 240,000 and 250,000 prior.
The current number remains consistent with the 2018-2019 average, despite a larger labor force now. The insured unemployment rate also hasn’t deviated meaningfully from what we’ve seen the past couple of years or the 2018-2019 average. Taken together these numbers tell us that hiring has slowed but concerns about the economy have not led to a big pick-up in layoffs. The unemployment rate ticked up because new entrants to the job market are having more trouble getting hired, but current workers are still experiencing relative job security.
The new jobs-related data also had an impact on rate cut expectations. After the jobs report had come out on August 2, expectations of a 0.50% rate cut in September had jumped from near zero to about 75%. By the end of the week, it had settled down to a 50% chance of a 0.5% cut and a 50% chance of a “normal” 0.25% cut in September. (Although keep in mind there is still a near 100% expectation that there will be a rate cut of some type in September).
Larger Swings Tend to Persist as the Market Recalibrates
We still believe the market is likely to push higher this year as the economy avoids recession, the Fed starts to cut rates, election uncertainty fades, and corporate earnings remain resilient. Still, markets are likely to continue to see bigger swings in both directions than we saw in the first half of the year. It’s normal to see larger swings even as markets go through the process of settling down. It’s uncomfortable, but often these normal pullbacks and corrections can make for a healthier market going forward.
This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
S&P 500 – A capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The NASDAQ 100 Index is a stock index of the 100 largest companies by market capitalization traded on NASDAQ Stock Market. The NASDAQ 100 Index includes publicly-traded companies from most sectors in the global economy, the major exception being financial services.
A diversified portfolio does not assure a profit or protect against loss in a declining market.
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