The current downturn in the stock market has stirred up familiar challenges for investors. As stock prices drop, the temptation to sell increases, but professional investors argue that this might be an opportune time to buy, likening the situation to a sale, despite the seemingly sudden market correction and a wave of concerning economic indicators—including the recent weak jobs report and disappointing earnings from major large-cap companies—they are advising to use this as an opportunity to look for deals, emphasizing the unpredictability of short-term market movements while reminding investors that the long-term trend is up.
One of the primary factors behind the recent market decline is the surprisingly low addition of only 114,000 new jobs in the US, the world's largest economy, last month. However, investors should be cautioned against emphasizing a single month's jobs data too much, suggesting that it might not indicate a broader economic trend. Employment reports are lagging. This led some analysts to wait until more employment data from the August numbers reported in September was available to confirm the rate cut amount. There is concern that if the number of new jobs created in August is weaker, the FED will cut 50 basis points. However, if the report is more substantial, which some believe could happen, the cut would only be 25 basis points. Investors and the FED seem to be data-dependent on the size of the next FED interest rate move.
In November, the US will hold its general presidential election, and depending on which party wins, it could either wreak havoc on the economy or create a boom. The race is expected to be extremely close, and the markets do not like uncertainty, adding to the anticipated volatility between now and the election.
Fed Watch Tool
Source: CMEGroup Exchange
The CMEGroup Exchange FedWatch Tool indicates that investors feel the FED will cut rates by 50 basis points to a new target rate of 475-500 basis points. This percentage is subject to a significant change if the August employment report creates more jobs than the July report did. The following employment report will be on September 06, and the next FED meeting will be on September 18.
Longer Term Perspective
Source: Barchart.com
Sometimes, investors can get too close to a market and lose perspective of the overall picture—case in point: the monthly chart of the S&P 500 index. The recent correction has only traded under the prior month's low. No significant support levels have been broken to change this long-term bull market. If you're an investor, step back and look at the bigger picture before panicking and selling your holdings because of the stories you hear on media outlets. Remember how they get paid, selling advertisements. The media must get traffic to their station or site to get advertisers. To do that, they must put the fear of god in investors so they feel compelled to follow the media closer.
Seasonality
Yes, stock indexes and other financial assets have seasonality patterns. Moore Research Center, Inc. (MRCI) research has shown that August has generally been down during the past 15 years (black line). The recent multi-month rally ended on July 16. The decline typically ends near the latter part of August before trading in a range or another corrective manner into October, where the next leg of the bull market resumes. This would coincide with the upcoming election on November 05, where a winner will be known, hopefully, and the market will know what to expect from the incoming party.
Source: MRCI
Source: Barchart.com
The daily S-P 500 chart shows how the market peaked late in July last year and went into a correction before bottoming out in October. July 2024 is looking very similar so far. Use this correction to increase your long-term positions or find new opportunities as prices fall and create more value. Each investor must use their strategy and risk management rules to determine if this is a fitting opportunity. Seasonality only creates a window of opportunity, but it's up to the investor to do their due diligence.
In Closing……
Investors must keep a long-term perspective as the market faces short-term volatility and uncertainty. While recent economic indicators, including a weak jobs report, may cause concern, the market's overall trend remains upward. Investors are advised to approach the current correction as a potential opportunity rather than a reason to panic. With critical events such as the Federal Reserve's upcoming decision on interest rates and the US presidential election on the horizon, the markets may continue to experience fluctuations. However, investors can navigate these challenges and capitalize on market dips by focusing on the broader picture and staying informed. Consider your investment strategy and risk tolerance when making decisions, and avoid being swayed by short-term news cycles.
On the date of publication, Don Dawson did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
