July ended with fear of a recession, but that didn’t stop a rally in the stock market. The S&P 500 rose 9.1% in July, for the benchmark index’s best month in almost two years. As a financial advisor in Flagstaff and Phoenix, we are here to help you navigate the choppy waters.
August stock market hot topics
Geopolitical Tension
Tension between the U.S. and China rose when U.S. House Speaker Nancy Pelosi visited Taiwan. China responded with military drills in the sea and airspace around the island. The relationship may get worse over proposed legislation that will change the USA’s policy on the self-ruled island. The bipartisan Taiwan Policy Act will improve ties with Taiwan.
Geopolitical events can increase market volatility and cause panic and bad decisions.
- If you’re investing for long-term goals remember that volatility is inevitable and stay in touch with your advisor.
- If your investment horizon is shorter than five years from now, consider keeping at least some cash reserves on hand in case markets drop further than expected during that period.
Interest rate hikes
The Fed raised short-term rates again at its July meeting, but the market’s reaction was positive. Investors believe the Fed’s plan is working to lower inflation, which may lead to fewer rate increases. Inflation signals are still mixed; prices at the pump are drifting lower, but the Fed’s key inflation indicator, the personal consumption expenditures index, stayed high in June.
A rising interest rate environment means that bonds will lose value as their yield rises relative to other investments like stocks or cash. This is especially true for long-term bonds (typically more than ten years) that are subject to greater interest rate risk than shorter-term bonds.
Note: longer-term yields tend to be more sensitive than shorter ones with respect to changes in market expectations about inflation and monetary policy conditions in the economy over time.
Market cycles
Since market cycles measure from peak to trough, a stock index reaches bear territory (officially) when the closing price drops from its most recent high at least 20%. A bull market begins when the closing price gains 20% from the low. - Stocks lose an average of 36% in a bear market. Conversely, stocks are known to gain an average of 114% in a bull market.
- Bear markets are normal: Since 1928 there have been 26 in the S&P 500 Index and 27 bull markets.
- Bear markets are usually short-lived: The average length is 289 days/9.6 months. (Keep in mind that the average bull market length is 991 days/2.7 years.)
- A bear market pops up approximately every 3.6 years.
- Half of the market’s strongest days in the past two decades occurred in a bear market.
- A bear market doesn’t always mean a recession is coming. Only 15 recessions have occurred in relation to the 26 bear markets since 1929. Yes, they accompany a slowing economy, but a market decline doesn’t always initiate one.
Did you know that with a 50-year investment horizon, you would experience about 14 bear markets? Of course it can be tough to see your portfolio take a plunge, but keep in mind that downturns are historically temporary. Bear markets can be painful, but overall, markets are positive a majority of the time.
GDP
The latest report revealed the second consecutive quarterly contraction. Two quarters of negative growth would have been labeled a recession in the past. Economists now add in other factors, like jobs and hiring, before labeling an economy.
4 keys to staying focused during market cycles
- Re-evaluate your risk tolerance
- Re-evaluate your financial goals
- Re-evaluate your asset allocation
- Re-evaluate your investment strategies
Communicate with your financial advisor in Flagstaff or Phoenix regularly during these times of volatility
Whether you’re invested entirely in equities or have an allocation to cash and bonds, communicate with your advisor regularly during these times of volatility if you need reassurance.
It’s always a good idea for investors to keep their financial advisor in Phoenix on speed dial, just in case.
When markets are volatile, and there’s a lot of noise, it can be tempting to make rash decisions based on emotions instead of facts. So whether you’re feeling nervous about your portfolio or just want someone else’s opinion on what’s going on, talking to your financial ally is probably one of the best things you can do.
The Takeaway
It’s difficult to time the market’s recovery. Remember that a bear market doesn’t always indicate an economic recession, so hunker down in the lows—volatility comes. Don’t make decisions you may regret later.
If you have questions about how these events may affect your portfolio or retirement plan, please reach out to our team of financial advisors in Phoenix and Flagstaff for some sound advice on the next steps.
