05 Aug Perspectives on The Market Selloff
Our investment team has put a few thoughts down on the market sell off that is occurring.
The global stock market selloff that began last week picked up steam on Monday driven by a confluence of events which collectively have shifted markets into “risk off” mode. Risk-assets have sold off and U.S. government bond yields have fallen sharply amid growing fears about slowing U.S. economic growth and a potential economic recession.
Below, we share a few general observations on the situation.
- The sell off was primarily ignited by two recent economic data releases last week that showed weakness in U.S. manufacturing data and a continued softening in the U.S. labor market as job growth declined (the U.S. economy added 114k jobs in July) and the unemployment rate increased to 4.3%, the highest level since 2021.
- As of mid-morning on Monday, the S&P 500 was down approximately 8% from its recent all-time high close.
- The tech-heavy and more growth-oriented Nasdaq Index which had led the market higher during the first half of the year and which carried the most stretched valuations (and thus most optimistic expectations) has sold off more sharply and is now down nearly 13% from its recent highs.
- Other segments of the U.S. stock market which lagged on the way up (and carried more attractive valuations) have held up considerably better. For example, the more value-oriented Dow Jones Industrial Average has declined by less than 6% from its recent high. Large-cap value stocks and the equal weighted version of the S&P 500 have both declined by even less.
- Despite the recent selloff, the U.S. stock market remains firmly in positive territory for the year.
- Sell offs of this magnitude are very normal. As shown in the nearby chart, on average the S&P 500 has experienced an intra-year decline of 14% despite posting positive full-year performance in 33 of the last 44 years since 1980.
- The U.S. stock market had been unusually calm in 2024 prior to the latest bout of downside volatility which no doubt makes the current drop feel even more jarring. Consider that the S&P 500 had delivered 38 new all-time closing highs in 2024 and had experienced just one daily decline of more than 2% since the start of 2023 prior to the one in late July.
- High quality bonds have delivered on their role as stabilizers in diversified portfolios as government yields have fallen sharply amid concerns around economic growth.
As we always do, our team will continue to monitor the capital clients have entrusted us to oversee alert them of any changes we make to our strategies. We hope these points bring some perspective to the recent headlines and coverage of the pullback the equity markets are experiencing.
Important Disclosures
The information presented in the material is general in nature and is not designed to address your investment objectives, financial situation or particular needs. Prior to making any investment decision, you should assess, or seek advice from a professional regarding whether any particular transaction is relevant or appropriate to your individual circumstances. The information herein was obtained from various sources. The information in this report is given as of the date indicated and believed to be reliable. Kathmere assumes no obligation to update this information, or to advise on further developments relating to it. The opinions expressed herein are those of Kathmere and may not actually come to pass. This information is current as of the date of this material and is subject to change at any time, based on market and other conditions. Index performance used throughout is intended to illustrate historical market trends and performance. Indexes are managed and do not incur investment management fees. An investor is unable to invest in an index. Past performance is no guarantee of future results.
The mention of specific securities and sectors illustrates the application of our investment approach only and is not to be considered a recommendation by Kathmere Capital Management. All investment strategies have the potential for profit or loss. Different types of investments involve higher and lower levels of risk. There is no guarantee that a specific investment or strategy will be suitable or profitable for an investor’s portfolio. Historical performance returns for investment indexes and/or categories, usually do not deduct transaction and/or custodial charges or an advisory fee, which would decrease historical performance results. There are no guarantees that a portfolio will match or outperform a specific benchmark. Index returns do not represent the performance of Kathmere Capital Management or any of its advisory clients.
Tactical allocation may involve more frequent buying and selling of assets and will tend to generate higher transaction cost. Investors should consider the tax consequences of moving positions more frequently. Stock investing involves risk including loss of principal. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market. Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks. Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise and bonds are subject to availability and change in price. Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate. High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors. Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply. Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards.
Kathmere Capital Management (Kathmere) is an investment adviser registered under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply any level of skill or training. The information presented in the material is general in nature and is not designed to address your investment objectives, financial situation or particular needs. Prior to making any investment decision, you should assess, or seek advice from a professional regarding whether any particular transaction is relevant or appropriate to your individual circumstances. Although taken from reliable sources, Kathmere cannot guarantee the accuracy of the information received from third parties.