Understanding Market Volatility

Updated Thurs, August 7th, 2024 | 4 Min Read

A Rollercoaster of Highs and Lows

In the financial world, we often witness the unpredictability of markets. Just last month, we experienced a peak in the stock market, reaching unprecedented highs. This optimism was fueled by cooling economic indicators and inflation, prompting the Federal Reserve to consider cutting interest rates. The volatility index (VIX) was low, and credit spreads were tight, signaling a stable environment. However, without warning, the market took a sharp turn.

Last week, the market's trajectory shifted dramatically as new economic data suggested a slowdown. Initial jobless claims and other disappointing figures led to a 1.4% drop in the S&P 500 on Thursday. The trend continued on Friday with more weak employment data, resulting in a 1.8% decline—the steepest two-day drop since the Silicon Valley Bank collapse in March 2023.

Significant Market Events and Their Impact

The weekend brought more startling news as Warren Buffett significantly reduced his Apple holdings. Despite Apple still making up 30% of Berkshire Hathaway's equity portfolio by the end of the second quarter, this move created waves across the market. Predictably, Apple’s stock took a hit, pulling down other major tech stocks with it.

The market turbulence was further exacerbated by developments in Japan, where the central bank's interest rate hike triggered significant shifts. For years, investors leveraged low Japanese interest rates to fund riskier investments in U.S. stocks, a strategy known as the carry trade. The recent rate hike led to a rapid appreciation of the yen, causing a substantial market reaction.

The Nikkei, which had seen an 18% increase through July, dropped 5% in just two days of trading in August, marking one of its largest declines since Black Monday in 1987.

Maintaining Composure Amidst Market Fluctuations

It’s natural to feel uneasy during such volatile times, but it’s crucial to avoid panic-driven decisions. This market selloff, while intense, is a part of the cyclical nature of investing. Despite the current downturn, the S&P 500 is still up 9% for the year, even though it has fallen approximately 9% from its recent peak.

In contrast to 2022, when both stocks and bonds suffered significant losses, bonds are currently providing some relief by offering diversification benefits. Over the past week, bonds have gained 2%, underscoring their role in balancing portfolios during turbulent times.

In moments of market turmoil, the impulse to move to cash can be strong, but it rarely pays off in the long run. As you can see below, once you pull your money out of the market, you are almost immediately likely to underperform, and the longer you stay out, the more you miss out on significant gains.

Focus on Long-Term Goals

It’s easy to get caught up in the short-term noise. Take a look at the graph below, and you can see that historically, the market has experienced unexpected turns, but on average, it steadily increases.

Market fluctuations are a normal part of investing, and staying the course can often lead to more favorable outcomes. Don’t try to time the market; focus on time in the market. Remember, a well-diversified portfolio and a disciplined investment strategy are key to weathering any storm.

Looking Forward with Optimism

Amid the chaos, there are reasons to remain optimistic. This selloff seems to be driven more by technical factors like margin calls and leverage rather than fundamental weaknesses in corporate earnings or valuations.

Major corporations such as Amazon, Meta, and Apple continue to demonstrate robust performance. Apple reported record revenues for its June quarter, AWS is showing renewed growth, and Meta saw a 22% increase in revenue year-over-year with only a 7% rise in expenses. These strong performances highlight the resilience and strength of key market players.

As the late John Bogle wisely noted, "The stock market is a giant distraction from the business of investing." While the timing of a market recovery is uncertain, history assures us that this phase will pass. Maintaining a long-term perspective and focusing on the fundamentals of investing are crucial during such times.

It May Be Time to Speak with a Financial Advisor

At Falcon Wealth Planning, we understand the anxiety that market fluctuations can cause. It’s essential to stay focused on your long-term financial goals and avoid making hasty decisions based on short-term market movements. Our team is here to provide guidance and support, helping you navigate these challenging times and keeping your financial plans on track.

Concerned about your portfolio? Reach out to our team here at Falcon Wealth Planning. We are committed to helping you achieve your financial goals, no matter the market conditions.

*The content in this blog is for general informational purposes only and does not constitute personalized financial, investment, tax, or legal advice. Falcon Wealth Planning, Inc., a fee-only, true fiduciary, registered investment advisor, provides this information to give a broad understanding of financial concepts and strategies.