Are storm clouds gathering this summer? There’s been a lot of chatter about a pullback. Should investors be worried about a market storm?
Let’s look at some factors that could trigger a market selloff in the weeks or months ahead.
(Note: I’m not at all saying a selloff is going to happen – we’re just discussing some factors that could contribute.)
When stocks repeatedly push new highs, it’s not at all uncommon to see a pullback as traders take profits. But, once the selling ceases, the market inevitably continues it’s perennial push to new highs.
Factor #1: Stocks are trading near record highs
Stocks have posted multiple record closes, and the S&P has been trading well above its 200-day moving average.1,2
When stocks repeatedly push new highs, it’s not at all uncommon to see a pullback as traders take profits. But, once the selling ceases, the market inevitably continues it’s perennial push to new highs.
Factor #2: Investors are watching the Fed like hawks
The 2024 rally is largely driven by the expectation of lower interest rates.
The Fed voted to keep rates steady at its most recent meeting, which wasn’t a surprise since the latest data didn’t show enough improvement in inflation.3
At this point, the market is pricing in the expectation of a fall rate cut.4
However, if the Fed indicates that it will delay rate cuts into 2025, markets may drop as investors revise their expectations.
Given that the European Central Bank and Bank of Canada recently voted to cut interest rates, it doesn’t seem likely that the Fed will be far behind.5,6
Factor #3: A “trigger event” could cause a selloff
Sometimes, even when overall conditions look good, a single event causes investor psychology to flip and markets to drop.
We can’t predict these events, but we can accept that they show up occasionally and build flexibility into our investing approach.
The chart below shows market drops in the S&P 500 since 2000.
You can see that markets have fallen at least 10% in the vast majority of years.
However, most of those years still ended in the green.
The big takeaway? Market drops are normal. They happen frequently.
Should you sit on the sidelines to wait out the uncertainty?
There’s an old investing adage that may have made sense once: “Sell in May and go away.”
The idea is that an investor ought to sit the summer out and buy back in later in the year.
That folksy advice might have made sense back in a more industrial economy when American factories would literally shut down during the summer to retool and give employees time off.
Today, that kind of advice simply doesn’t match our complex world.
Markets move quickly, and sitting on the sidelines often means missing out on the recovery.
As it stands right now, the overall case for the economy and stocks remains positive, but that doesn’t rule out any possibility of a market pullback. That is simply always on the table.
Should you worry… No.
These occurrences are normal and fairly frequent.
😎 ⛱️ Enjoy your summer. We’re monitoring everything.
Sources
1. https://www.morningstar.com/news/marketwatch/20240610458/stocks-on-the-road-again-to-record-highs-says-ubs
2. https://www.cnbc.com/2024/06/10/stock-market-today-live-updates.html
3. https://www.cnbc.com/2024/06/12/fed-meeting-today-on-interest-rate.html
4. https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
5. https://www.reuters.com/markets/rates-bonds/bank-canada-cuts-rates-first-time-four-years-2024-06-05/
6. https://www.bbc.com/news/articles/c511jy6z41vo
Chart sources: https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/insights/market-insights/guide-to-the-markets/mi-guide-to-the-markets-us.pdf
Concerns or questions about how your investment portfolio will hold up in the current market environment? Contact Financial Synergies today.
We are a boutique, financial advisory and total wealth management firm with over 35 years helping clients navigate turbulent markets. To learn more about our approach to investment management please reach out to us. One of our seasoned advisors would be happy to help you build a custom financial plan to help ensure you accomplish your financial goals and objectives. Schedule a conversation with us today.
More relevant articles by Financial Synergies:
Storm Clouds Gathering?
Are storm clouds gathering this summer? There’s been a lot of chatter about a pullback. Should investors be worried about a market storm?
Let’s look at some factors that could trigger a market selloff in the weeks or months ahead.
(Note: I’m not at all saying a selloff is going to happen – we’re just discussing some factors that could contribute.)
Factor #1: Stocks are trading near record highs
Stocks have posted multiple record closes, and the S&P has been trading well above its 200-day moving average.1,2
When stocks repeatedly push new highs, it’s not at all uncommon to see a pullback as traders take profits. But, once the selling ceases, the market inevitably continues it’s perennial push to new highs.
Factor #2: Investors are watching the Fed like hawks
The 2024 rally is largely driven by the expectation of lower interest rates.
The Fed voted to keep rates steady at its most recent meeting, which wasn’t a surprise since the latest data didn’t show enough improvement in inflation.3
At this point, the market is pricing in the expectation of a fall rate cut.4
However, if the Fed indicates that it will delay rate cuts into 2025, markets may drop as investors revise their expectations.
Given that the European Central Bank and Bank of Canada recently voted to cut interest rates, it doesn’t seem likely that the Fed will be far behind.5,6
Factor #3: A “trigger event” could cause a selloff
Sometimes, even when overall conditions look good, a single event causes investor psychology to flip and markets to drop.
We can’t predict these events, but we can accept that they show up occasionally and build flexibility into our investing approach.
The chart below shows market drops in the S&P 500 since 2000.
You can see that markets have fallen at least 10% in the vast majority of years.
However, most of those years still ended in the green.
The big takeaway? Market drops are normal. They happen frequently.
Should you sit on the sidelines to wait out the uncertainty?
There’s an old investing adage that may have made sense once: “Sell in May and go away.”
The idea is that an investor ought to sit the summer out and buy back in later in the year.
That folksy advice might have made sense back in a more industrial economy when American factories would literally shut down during the summer to retool and give employees time off.
Today, that kind of advice simply doesn’t match our complex world.
Markets move quickly, and sitting on the sidelines often means missing out on the recovery.
As it stands right now, the overall case for the economy and stocks remains positive, but that doesn’t rule out any possibility of a market pullback. That is simply always on the table.
Should you worry… No.
These occurrences are normal and fairly frequent.
😎 ⛱️ Enjoy your summer. We’re monitoring everything.
Sources
1. https://www.morningstar.com/news/marketwatch/20240610458/stocks-on-the-road-again-to-record-highs-says-ubs
2. https://www.cnbc.com/2024/06/10/stock-market-today-live-updates.html
3. https://www.cnbc.com/2024/06/12/fed-meeting-today-on-interest-rate.html
4. https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
5. https://www.reuters.com/markets/rates-bonds/bank-canada-cuts-rates-first-time-four-years-2024-06-05/
6. https://www.bbc.com/news/articles/c511jy6z41vo
Chart sources: https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/insights/market-insights/guide-to-the-markets/mi-guide-to-the-markets-us.pdf
Concerns or questions about how your investment portfolio will hold up in the current market environment? Contact Financial Synergies today.
We are a boutique, financial advisory and total wealth management firm with over 35 years helping clients navigate turbulent markets. To learn more about our approach to investment management please reach out to us. One of our seasoned advisors would be happy to help you build a custom financial plan to help ensure you accomplish your financial goals and objectives. Schedule a conversation with us today.
More relevant articles by Financial Synergies:
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