“Thoughts on this Weeks Volatility“

I’m writing this on Tuesday, August 6^th so take the context into account as you read this on Friday morning but we’ve already had a busy week in the market.  I find it helpful to always take a step back, breathe, and put market swings and volatility into context.  As you all know, volatility is a completely normal and sometimes healthy part of the stock market.  It is common to have 5% to 10% drawdowns at multiple points during a calendar year.  Knowing these drawdowns happen doesn’t make it easier when they occur, but can help to take our focus from the short term to the medium to long term.

Year to Date Performance is Still Impressive

Despite this weeks sell-off we are still up over 11% for the year!  Sure, those returns are never guaranteed to stick around, but zooming out from a rough week and looking over the last 7 months (or even further) shows a much different picture.  Let’s also not forget that just a short month ago, the stock market hit new all-time highs.  Inflation appeared to be cooling (albeit slowly) and the Fed started hinting that signs were showing for a possible rate cut.  Speaking of rate cuts that brings me to my next point…

We have more Dry Powder than Previous Corrections

If we do start to see more volatility in the stock market, or continued increases in the unemployment rate, we now have the ability to cut rates which is not something we had much of the ability to do between 2008 to 2022.  Rates were cut aggressively during the global financial crisis and really stayed very low for the better part of 14 years.  If we experienced an economic weakening we defaulted to stimulus or the Fed buying up bonds in the open market to help drive demand.  Now, with the current Fed Funds rate sitting above 5% we at least have dry power that we haven’t had for a long time.  If the fed does follow through with a rate cut (as expected) that will not only embolden companies looking to borrow but could also slowly help the housing market demand to pick back up with mortgage rates falling.

Anxiousness is Normal but not Required

As Michael Batnick of The Irrelevant Investor stated: “It’s okay to feel anxious about all this, but giving in to fear is never a good strategy. Now is always a good time to have perspective. This selloff, while strong and painful, is a normal part of investing.”

While it was a rough few days in the market with some quick downward swings it can also be seen as a healthy reset.  Leverage was reduced, spook selling occurred but what didn’t seem to drive much of the sell-off was company fundamentals.  For the most part, large cap companies balance sheets remain cashed up and ready to weather any potential short- or long-term storms.

It’s great to remember an old John Bogle quote which famously says, “The stock market is a giant distraction from the business of investing.”

While there are always reasons to sell if you watch the news, I’m confident as always that these headlines will come and go and the market will still be there…slowly but surely ticking up and to the right over the long-term.

Market indices listed are unmanaged and are not available for direct investment.