Resources/Weekly Insights

Volume 13, Edition 19 | August 3 - August 9, 2024

A Good Gut Check for Investors

Doug Walters, CFA

A little market turmoil creates an excellent opportunity for investors to ensure they are mentally prepared for the inevitable volatility that comes with equity investing. Evolution has done us no favors on this front.

Contributed by Doug Walters, David Lemire, Max Berkovich

By the time I retired to bed on Monday, I had fielded numerous comments from friends and family that went something like this, “I heard about the market crash. It sounds awful.” I congratulate the media for successfully creating yet another storm in a teacup. You can’t blame them; that is how they keep the lights on. But it is not helpful for the average investor who already carries around enough evolutionary baggage.

These moments of fear can understandably drive investors to want to do something… anything. It’s called “action bias,” and it is ingrained in us. Apparently, in our evolutionary history, sitting static in the face of danger, like a charging saber-toothed tiger, was not a desirable trait for survival. Imagine that. So, we are built for action. However, that same action bias works against investors, often prompting market timing, a significant cause of wealth destruction.

Why doesn’t market timing work? I’ll give you three reasons:

You have probably heard of the show Are You Smarter Than a Fifth Grader. How about, Are You Smarter Than Millions of Investing Professionals? To successfully market time, you must outsmart the millions of professional market participants whose opinions and actions determine prices daily. Not only that, you have to outsmart them twice: once on the way out and once on the way back in. Good luck!
Now, have a look at a long-term chart of the stock market. What you’ll see is that it generally goes up. Does betting against that trend seem like a good idea? For gamblers, your hit rate would likely be around 45%, which is not much better than some slot machines. If you exit the market in fear, you are gambling and, more likely than not, will lose over time.
If you look back in history, significant declines have been followed by big gains. The worst ten one-day declines in the S&P 500 over the past 30 years averaged -8%. The average gain on the very next day was 5%. Missing that 5% rebound due to fear would damage your portfolio; a mistake that will compound over time.

This week was a test for investors and a good reminder of how quickly market, investor, and media sentiment can turn negative. Evidence-based investors know how to hold their nerve and keep their eye on the long-term prize. Set aside your fears and stick to your plan.

.07%

Performance of the S&P 500 this week

After all the drama of Monday’s sell off, the S&P 500 ended the week roughly flat as investors’ nerves settled.

Headline of the Week

Gray Monday

The start to the week saw the media head into the archives to dig up photos from October 1987 showing distraught traders with head in hands lamenting the S&P 500’s 20% decline. This past Monday saw a more modest 3% decline for the S&P 500 while Japan dropped 12%. Since then, calmer heads have prevailed. Before this week, markets had gone through an extended period of relative calm, with the media chronicling the lack of 3% or even 1% moves.

Markets generally take good and bad news in stride. However, they tend to pitch fits when confronted with surprises or uncertainty. This week arguably was a reaction to both, with last Friday’s disappointing jobs report sparking uncertainty around Fed policy and Japan announcing a surprise rate increase. Both moves, coupled with leveraged crowded trades, triggered a rush for the exits. Fast-forward a few days, and another employment report allayed Fed policy angst, and Japanese authorities tempered their thoughts about raising rates.

Needless to say, we probably will not read any stories on the lack of volatility for a bit. We could see continued gyrations until the mother of all Fed meetings in September.

The Week Ahead

There is no such thing as a quiet time in the markets this summer, as inflation reports, retail sales reports, and earnings can trigger market gyrations at home. In addition, economic growth numbers from the United Kingdom, European Union, and Japan for the second quarter are sure to add to market unease next week.

Hole lot of noise

Inflation reports next week will be critical ahead of the Jackson Hole Economic Symposium in Wyoming later in the month.

The Consumer Price Index (CPI) on Wednesday and the Producer Price Index (PPI) on Tuesday will be the freshest inflation number central bankers will have when they gather for the annual conclave.
CPI is expected to continue easing, with annual inflation for July reading 2.9%, down from 3% in June. Core inflation, which excludes food and energy, is similarly expected to drop to 3.2% from 3.3% in June.

By Product

2nd Quarter Gross Domestic Products (GDP) from three major economies could offer plenty of noise.

Japan’s GDP is probably the most important, as Japan was the epicenter of the most recent market tantrum.
The Japanese economy is expected to have expanded by 0.5% in the 2nd quarter, which may not be strong enough to warrant more rate hikes.
The United Kingdom’s GDP is expected to have increased by less than 1% in the quarter, the same as in the first quarter, which should be low enough to keep hopes alive for further rate cuts.
The European Union’s GDP is also expected to have expanded slightly at 0.3% for the quarter, but this is before the Taylor Swift effect and the Olympics in Paris, which will show up in the 3rd quarter numbers.

Shopping Trip

A retail sales report and the University of Michigan consumer confidence index will pair with earnings from Home Depot (HD) and Wal-Mart Stores (WMT) to give us a read on the health of the consumer after a weak jobs report for July.

Walmart stock is up over 25% so far this year but revenue growth estimated at 4.2% may not be enough to power the stock higher since the previous two reports had revenue expand by over 5%.
Retail sales are expected to keep expanding, with international travel being a standout.

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