In light of recent stock market activity, we wanted to take the opportunity to comment and relay our thoughts. As of this writing, the S&P 500 is down nearly -4%, the Nasdaq 100 is down about -5% and the Russell 2000 is down about -7% since market open 8/1/2024. A weak jobs report has scared investors as the prospect of a recession becomes a real concern.
Not surprisingly, the best-performing sectors during this period are defensive: utilities, REITs, health care, and consumer staples. The worst-performing sector is technology.
As this daily chart of the S&P 500 shows, this recent decline is just a blip right now:
Given the uptrend, it’s likely that this recent decline will reverse & rally at some point next week before further declines possibly occur.
The key takeaway is that after such a sustained uptrend, markets do not typically reverse and undergo an abruptly severe downturn. Rather, the snap-back rallies often occur as the extreme bullish sentiment remains and needs to be gradually worked off or pierced.
The following chart shows performance for the S&P 500 (red line) and the equal-weight S&P 500 (RSP, green line) since the start of 2022:
It took about two years from the start of 2022 for the S&P 500 and RSP to get back to breakeven. The gains so far this year have come with the cap-weighted S&P 500 further distancing itself from the equal-weight S&P 500.
The following chart shows a momentum indicator in the upper inset and the S&P 500 (red line) in lower inset:
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When the momentum indicator has reached the 1.9 level or higher (orange horizontal line), it’s a sign that the market has become extremely overbought or overheated. Note the yellow highlighted areas on the S&P 500 (red line) marking these extreme overbought periods. Typically, meaningful equity corrections have followed.
Another reason to expect a more significant correction from here is seasonality; historically, August-September has been the worst two-month period for the market.
Finally, when the Fed starts cutting rates after a prolonged period of raising rates, the S&P 500 (stocks) tend to decline. The stimulative effect of the rate cuts tends to get overwhelmed by the growing fear in investors, as they sell stocks in response to concerns about a recession (not knowing if will be mild or deep). The orange line in the chart below is the 2-year government bond yield, which as you can see tends to lead the Fed Funds rate (black line). When the 2-year bond yield is lower than the Fed Funds rate, as it has been for months, that’s typically not good for stocks, as evidenced by the green line (S&P 500).
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As always, if you have any questions, please contact us. The entire team at Measured Wealth wishes to thank you for entrusting us to deliver on your financial goals.
Edward Miller, CFA, CMT
Chief Investment Officer
Measured Wealth Private Client Group
Important Disclosures
Historical data is not a guarantee that any of the events described will occur or that any strategy will be successful. Past performance is not indicative of future results.
Returns citied above are from various sources including Bloomberg, Russell Associates, S&P Dow Jones, MSCI Inc., The St. Louis Federal Reserve and Y-Charts, Inc. The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. Investing involves risks, including possible loss of principal. Please consider the investment objectives, risks, charges, and expenses of any security carefully before investing.
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