Resources/Weekly Insights

Volume 13, Edition 18 | July 27 - August 2, 2024

An Opportunity for Investors to Shine

Doug Walters, CFA

Declines of the past two weeks reminds investors that the market does not just go up. Successful investors, who hold their nerve, differentiate themselves at times like these.

Contributed by Doug Walters, David Lemire, , Max Berkovich

So, apparently stocks can go down too. Investors were reminded this week of the inconvenient fact that the attractive long-term returns they enjoy from stocks come at a cost. The cost that investors pay is the unpredictable swings of the daily and weekly stock prices. We call that volatility.

Markets had much to digest this week. Job creation came in light, jobless claims came in heavy, the Fed held rates high, and Tech earnings revealed signs of tarnish on the luster of the AI narrative. Throw in an election year and you have yourself a recipe for volatility.

Is this a sign of things to come? Is the Fed behind the curve and leading us to a hard landing? It is far too soon to tell. Declines like this are normal, and we’ve been here before. In fact, we’ve been here multiple times in the last two years.

In October of 2022, the market reached a low and has since been on a tear. From that low to the peak a couple of weeks ago, the S&P 500 rose an impressive 63%. Yet, along the way this happened:

11/30/22-12/28/22: down 7.2%
2/2/23-3/13/23: down 7.5%
7/31/23-10/27/23: down 9.9%
3/28/24-4/19/24: down 5.4%

So yes… drawdowns are normal and this most recent 5.6% slide is not spectacular even in the context of the past two years.

Evidence-based investors do not spend time speculating about what might come next. Rather, we take comfort in knowing we can take advantage of our well-diversified portfolios. It is not that we have a magical formula to avoid these drawdowns. What we do have is opportunistic rebalancing that will identify opportunities to systematically sell high and buy low amongst our diverse holdings.

An investor’s response to market volatility can be what makes or breaks them in the long run. Those who hold their nerve and invest based on the facts, give themselves an edge verses those who succumb to emotion.

63%

S&P 500 performance in the run up of the past two years

From the trough in October of 2022 to the market peak on July 16th, the S&P 500 rallied 63%. The recent pullback is a healthy check on market expectations.

Headline of the Week

FREEDOM!!

Thought we would take a pause from rates, stocks and bonds and welcome Evan Gershkovich home. In our tense and divisive times, it was a thrill to see The Wall Street Journal reporter step off the plane after over a year of Russian captivity. Diplomatic solutions to the world’s vexing problems have been few and far between, so a tip of the hat to the State Department and our allies for bringing these folks back to the land of the free.

The Week Ahead

After central bank rate decisions, a job report, and Big Tech earnings this past week, we have a nice mellow week ahead, with only the Purchasing Managers Index and earnings slated to raise eyebrows.

Reading the Trends

The Institute of Supply Management Purchasing Managers Index (PMI) is a monthly survey and on Monday we get the service sector survey for July.

The consensus is calling for a reading of 51, which indicates expansion. This would be a flip from the sub-50 reading in June.
PMI is considered a leading economic indicator and tends to boost investor confidence when it goes into expansion.
The opposite is also true…
The July manufacturing flavor of the index is in contraction territory at 46.8, which was below expectations.

Cat and Mouse

Earnings season shifts away from Technology with a heavy dose of Pharmaceuticals and a few old blue chips.

Eli Lilly (LLY), Novo Nordisk (NVO), Gilead Sciences (GILD) and Amgen (AMGN) stand out as the big pharmaceutical names on the calendar.
The first two are the main producers of GL-1 weight loss drugs so they will get plenty of attention.
The other health care related names to watch include CVS Caremark (CVS) and healthcare product distributor McKesson (MCK).
This Saturday, Warren Buffet’s Berkshire Hathaway (BRKA,BRKB) will release quarterly earnings for the conglomerate, which includes insurance, energy, utilities, railroads and more.
Lastly, the big blue chip names Walt Disney (DIS) and Caterpillar (CAT) tend to get investor attention as these are widely held.

Far East and Down Under

A lot of this will happen overnight while we are asleep…

Japan just raised rates for the first time, so a summary of opinions and meeting minutes from that meeting will be of interest.
The Australian central bank has a rate decision, but no action is currently the base case.
China will release some key economic data next week. The Consumer Price Index and trade balance data will be closely watched by investors.

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