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Strategic Insights

Volume 10, Edition 28 | August 16 - August 20, 2021

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Be Thankful for Volatility

Doug_Walters Doug Walters | Articles

Read Time: 3:00 min

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This week, stocks provided investors with a bit of volatility thanks to The Fed, the delta variant, and soft data. While market ups and downs can take a toll on your emotions, be thankful for the long-term benefits.

Contributed by Doug Walters , Max Berkovich , Frederick Hole

It is easy to get lulled to sleep by this market that seems to know only one direction: up. But this week provided investors a wake-up call and a reminder that the stocks can, do, and should go down at times… and that is okay.

If you are not following the stock market tick-by-tick (and you should not be), do not worry, this was not, in the end, a horrible week for equities. The S&P 500 was down a pedestrian 0.6%. So why did it feel worse? Sure, the market had fallen over 2% at one point in the week, but that is not an unusual decline. The answer perhaps lies in behavioral finance.

We have mentioned it before, but as humans, our sense of pain is much more potent than that of joy. The same is true with investing. Let’s do a little thought experiment. On a scale of 1-10, how bad did it feel in March of 2020 as the stock market fell over 30% in the span of a few weeks? I would venture that most would rate that pain fairly high. It can be gut-wrenching to watch your investments fall even modestly. In contrast, how much joy have you felt about the stock market rally since the pandemic lows? Would it surprise you to hear that the S&P 500 is up 100% since then? Have you felt 2x as much joy as compared to the pain experienced during the decline? Likely not.

As evidence-based investors, we know these biases and ensure that these emotions do not influence our decision-making. Investments, particularly stocks, go up and down, sometimes significantly. In fact, the long-term return investors earn by holding them is a reward for this volatility. If there were no volatility, there would be little-to-no reward (e.g., cash). So the next time we go through a genuinely volatile period for equities, brush that pain aside and be thankful for the long-term benefits that those ups and downs deliver!

-1.1%

Growth in Retail Sales

Declining retail sales dampened sentiment, with optimists pointing the finger more at Amazon’s Prime Day than the covid delta variant.

Headlines This Week

Stocks were down on the week, though they bounced 1% from Wednesday’s lows. The volatility was driven by a combination of covid delta variant jitters, Fed speak, questionable economic data, and geopolitical unrest.

Taper Talk

At a time when the market was already facing sentiment headwinds from the spread of the covid delta variant, the Fed released its FOMC meeting minutes Wednesday.

  • The report revealed that most Fed officials saw the central bank beginning to slow down its asset purchases (quantitative easing) later this year. The purchases keep bond yields and interest rates low, which is a boost for stock demand.
  • Even though “tapering” of asset purchases is the expectation, it appears to have caught the market a bit off guard and contributed to recent stock weakness.

Shopping Shortage

Retail Sales data were also negative for sentiment this week.

  • The monthly report on sales showed a 1.1% month-on-month decline which was well below consensus.
  • The weak data raises concerns that the delta variant is beginning to impact spending patterns.
  • Optimists point out that the previous month included Amazon’s Prime Day, which pulled many purchases forward and created a difficult comparison. Perhaps next month will be more telling.

Geopolitical Headwinds

Not helping investor mindset were the developments in Afghanistan.

  • The Middle East is no stranger to geopolitical turmoil, and that in itself is generally not a driver of markets in the US.
  • However, there could be concerns that the fallout from the Afghanistan withdrawal could complicate the political path for the infrastructure stimulus bills – which are more immediately relevant for US investors.

The Week Ahead

Jackson Hole Week

The Kansas City Fed will be hosting their annual Jackson Hole Economic Policy Symposium next week, with investors waiting patiently for any key announcements. 

  • Unlike last year’s virtual meeting, this year’s economic symposium will be a limited in-person event in the Wyoming ski town starting Thursday and running until Saturday.  
  • With hints coming from all directions that the Fed’s bond-buying program will start to taper off by the end of the year, the questions now turn to the methodology that the central bank will employ.
  • While there is a growing sense that markets will not get all the answers they are looking for next week, any additional clarity from Chairman Powell in his keynote address on Friday will be welcomed. 

Recovery Check-in

Next week will start with preliminary Purchasing Managers Indexes (PMI) from both sides of the pond.  

  • The US, Eurozone, and the UK are all out with their numbers on Monday. 
  • Across the board, expectations are for a slight decrease from the 15-year highs seen in July.  
  • The market will be keeping a close eye to see the effect of the delta variant’s spread on these insightful metrics. 

Friday Data Day

A busy end of the week with several important data points to look at.  

  • Top of the list is the Fed’s go-to inflation metric, core personal consumption expenditures (PCE), which is expected to edge up to 3.6% year-on-year from last month’s 3.5%. 
  • Personal income and spending numbers are expected to stay in positive territory at 0.2% and 0.5% month-on-month respectively.  
  • Finally, the final estimate of August’s Michigan consumer sentiment index is sure to grab some attention as continued increases could alleviate growth concerns. 

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