You may have heard the phrase, “Sell in May and walk away.” This phrase refers to stock market activity and how often the Summer can be a slump for stocks.
Recently, we experienced a significant sell-off, but it didn’t last.
One may have expected a rotation in stocks when the recovery happened. That wasn’t really what occurred for the most part. A recent report by LPL’s Chief Investment officer, Marc Zabinski, said this:
“Stocks must have gotten the memo that August tends to be weak historically. July, the eighth positive month in the past nine, was quickly forgotten as the beginning of August greeted us with a sell-off. The primary catalyst was August 2nd’s weaker-than-expected employment report, which ignited concern that the U.S. economy could tip into recession. Several additional factors exacerbated the selling pressure:
- Overly bullish sentiment and elevated valuations. Investor sentiment had become a bit frothy, particularly in the tech sector, and stocks had simply gotten a bit ahead of themselves, as discussed in LPL’s Midyear Outlook 2024: Still Waiting for the Turn.
- Seasonality. The historically weak month of August is a logical time for a sell-off to reset investor sentiment to more normal levels.
- Increased scrutiny around the payoffs for artificial intelligence (AI) investments. This scrutiny followed some evidence of slowing consumer demand during second-quarter earnings season.
- Leverage in the financial system. Borrowing in the yen (the so-called carry trade) is unwinding as global markets fall and the yen surges — plus some institutional traders appear to have been caught offsides in the downdraft, driving more forced selling.
Periods of increased volatility are exacerbated by program trading.
The use of algorithms and computers “algo trading” also adds to volatility. While program and algo trading differ, both now can prompt trading without a human making decisions outside of establishing trading parameters.
As we integrate even more AI into market activity, periods of volatility will increase. If we’re not careful, it may be easier to get caught on the wrong side of trades.
Often, being on the wrong side of the market is because irrational emotions win out over logic.
I learned long ago that two big human motivators are fear and greed. Famous investor Warren Buffet once said that it’s wise for investors “to be fearful when others are greedy and to be greedy only when others are fearful.”
The fact is that those who remain calm and look at a proper perspective are far less likely to take knee-jerk, incorrect actions.
I have the advantage of 38 years as a financial advisor. This helps me in making rational moves during market volatility. What I have to remind myself of is that not all clients have that advantage and may need some hand-holding from time to time. Fortunate for me, I have come to enjoy these “counseling” sessions. To put myself in the client’s shoes I need only to think back to my early days in the business.
In October 1987, the market declined 31.5%. Of that, 4.6% occurred on October 16th and 22.6% occurred on October 19th. I feverishly tried to gather any information that was available. Absence of internet access, information was pretty much limited to the one financial network I had available to me and the in-house broadcasts of the firm I was working for.
My light bulb moment occurred when the firm’s global strategist pointed out that an 18-month bear market had occurred in less than a month.
The Yin and Yang before me were adversity and opportunity. Was there opportunity? Yes! I found buying opportunities in the market as you would expect. More importantly, this experience changed the way I looked at adversity forever. It also taught me how to communicate and share that experience.
I am blessed to have had those experiences. I’m further blessed to have a smart and experienced team members who understand the importance of using our experience and enjoy using that experience to help others.
September 2024
