What is driving the volatility?

September 16, 2024

Markets tumbled recently, giving their worst performance of 2024. [i]

And then promptly rallied again.

You are probably not surprised if you have been reading my recent emails.

Let’s talk about what’s going on.

What is driving the volatility?

Profit-taking, for one.

Markets notched big gains in August, and traders decided to cash in some profits, which drove prices lower.[ii] They realized they should have taken some gains earlier after many were caught flat footed by the July decline.

Economic concerns are also in focus again.

The latest jobs report showed that the labor market is slowing down, as feared.

August data showed that jobs grew by a lukewarm 142,000, missing expectations.[iii]

Data for prior months were also revised downward (no surprise since that has happened for the year plus), giving July the lowest job creation number since December 2020.

Markets dropped in response to the data, largely out of worries about growth.

This behavior is the flipside of the trend we’ve seen repeatedly this year—where markets reacted positively to “bad” news because traders hoped it would boost the case for the Federal Reserve’s cut in interest rates.

Now, bad news is bad news again unless it is good news. It is about as clear as mud. We can expect this kind of vacillation between optimism and worry to continue.

What happens next?

Markets have had a strong run this year through the end of August.[iv]

Now, we may be entering a chopp(ier) season for markets.

We have a lot of uncertainty on the horizon: economic news, Fed moves, a presidential election, and geopolitical issues that oscillate between heating up and cooling off.

Seeing more volatility or a bigger correction as investors digest Fed policy and economic data would not be surprising.

However, the fundamentals still support growth (albeit at a slower pace), and inflation has moderated (at least for now).

It is always tempting to tactically sell and wait out rocky markets.

The problem is that it leaves you on the sidelines when markets move again.

The chart below shows significant market drops since 2000.

You can see that corrections happen pretty regularly, even in very profitable years.

One of my favorite sayings about the market is “risk happens slowly and then all at once”. This is both for downside and upside risk.

I wish I could predict when markets would drop and pick back up again. If that were the case, I would have a 300-foot mega yacht and I would be sending this email from Côte d’Azur. But no one can (and I am certainly not in the South of France.)

We build strategies based on your goals and harness the market to put our probability-based portfolios to work.

We make careful adjustments and tactical shifts when needed and always try to minimize the volatility.

However, we do not let short-term market moves and media noise throw us off course. This is especially important during an election year. You will be hearing about “Trump trades” and “Kamala stocks” every other day. This is not for your benefit; it is for the people touting those strategies to make money. Try to ignore it as best you can.

My team and I are watching and will keep you updated throughout what is likely to be a rocky fall.

Sincerely,

Michael

[i] https://www.cnbc.com/2024/09/08/stock-market-today-live-updates.html

[ii] https://www.cnbc.com/2024/09/09/fed-jumbo-50-bps-rate-cut-should-not-raise-alarm-analyst-says.html

[iii] https://www.foxbusiness.com/economy/us-jobs-report-august-2024

[iv] https://www.spglobal.com/spdji/en/commentary/article/us-equities-market-attributes/