We examine three factors that contributed to this week’s big stock market declines, analyze whether a recession is imminent, and examine David’s recent portfolio changes.
Topics covered include:
- The benefits of looking at market and economic trends monthly
- How bad was the recent U.S. employment report and what is the Sahm Rule
- What are leading economic indicators saying about recession risk
- Why the Federal Reserve will be lowering its policy rate, leading to lower cash yields
- Why the Japanese yen strengthened, leading to market turmoil
- Why investors are rotating from large cap growth to small cap value stocks
- How David locked in higher yields
Show Notes
Transcript of Chair Powell’s FOMC Press Conference July 31, 2024—The Federal Reserve
Goolsbee Says Fed Won’t Overreact to One Month’s Data by Catarina Saraiva and Ananya Chag—Bloomberg
Investments Mentioned
Investments Mentioned
Vanguard Growth ETF (VUG)
Vanguard Small Cap Value (VBR)
iShares International Developed Small Cap Value Factor ETF (ISVL)
Invesco BulletShares 2031 Corporate Bond ETF (BSCV)
iShares Large Cap Max Buffer ETF (MAXJ)
BlackRock AAA CLO ETF (CLOA)
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Transcript
Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today is episode 489. It’s titled “Why Did Markets Sell Off? What Should You Do?”
The Market Sell Off
Yesterday, Monday, August 5th, was one of those violent drops in the stock market that can be incredibly unsettling. On Monday, the Japanese stock market fell over 12%. Its worst one-day decline since 1987. In October 1987, the U.S. stock market and many markets around the world fell over 20%. This past Monday, most other stock markets besides Japan fell between 3% to 4%.
The VIX Volatility Fear Index—this is essentially the volatility priced into S&P 500 U.S. stock options—it jumped to 55 during the trading day on Monday and ended at 38. Back at the end of July, it was around 16.
We’ve seen interest rates fall in the U.S. The 10-year Treasury bond has fallen about a third of a percent in the past couple of days, taking it down to 3.8%.
This violent drop in the stock market reminded me of really last time this happened, and we did an episode on it. It was June 2020. I was out with LaPriel, we were up in the mountains, and I happened to get some internet, and I saw that the Dow Jones Industrial Average had plummeted 6.9%. It can invoke some fear, some uncertainty. We ask, “What is going on?” We think about our portfolio.
Maybe it’s too risky. Perhaps we’re approaching retirement, and then we worry “Well, what if things keep getting worse and we won’t be able to retire? Should we start selling?” Apparently, a lot of people wanted to sell on Monday, because it looks like the Charles Schwab and Fidelity apps ran into some technical issues. People couldn’t log on to their accounts. Now, perhaps there was just too many people.
Others look at drops like this and think “Well, maybe it’s a buying opportunity.” The market turmoil yesterday happens during the one week where I’m preparing the monthly investment conditions and strategy report we do for Money for the Rest of Us Plus. This is also the week we hold our monthly webinar for Asset Camp subscribers. This is our stock and bond market data and research service. So in this episode, I thought it would be helpful to unpack what I’m seeing as I prepare the investment conditions report for our membership community and get ready for this webinar. What am I seeing?
What Happened?
My preferred time period is to analyze markets on a monthly basis, once a month. That’s frequent enough to stay on top of any shifting trends, but not so frequent as to get overwhelmed. Too much data, too much information. That’s why we update the financial data on Asset Camp monthly instead of daily. And it’s why I prepare a monthly investment conditions report every month, like I’ve done for the past decade. And prior to that, as an asset manager and investment advisor, looking at markets formally on a monthly basis.
So in looking at what happened, the first thing I tried to deduce is figure out “Well, what motivated the change in sentiment? What’s changed?” And there’s really three things that I saw. First, there was a weaker than expected U.S. jobs report, that has increased fears of a recession. The second thing that happened was the Bank of Japan raised its policy rate for the second time this year, after having a zero percent to negative policy rate since 2016. We’ll look in more detail why that even matters. And the third thing is there were worries regarding the profitability of big tech companies, given their massive investment in AI.
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