Understanding The Recent Stock Market Situation

Recent market turbulence has sparked concerns about a potential downturn, but it’s essential to differentiate between a temporary correction and a bear market.

Understanding the nature of these fluctuations and their recovery patterns can help investors navigate through the current volatility with a clearer perspective.

This article provides insights into what happened on Monday 5th of August 2024 and outlines strategies to stay informed and resilient.

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Table of Contents

Introduction

On Monday 5th of August 2024, global stock markets experienced sharp declines across major indices.

This reported market turmoil was driven by a combination of factors, including reported weaker-than-expected jobs data in the United States, fears of a potential recession, and concerns over the Federal Reserve’s interest rate policies which have been on the minds of many for some time now. Compound this with Japan’s central bank deciding to tighten monetary policy which caused bond yields in Japan to fall sharply which then triggered record declines in Japan’s three largest banks wiping $85 billion from their market value over a two day period.

The reporting on this news has therefore resulted in the Nasdaq index falling by 6.3%, while the Dow Jones and S&P 500 also saw declines. The Nikkei 225 in Japan experienced its worst day since Black Monday in 1987, falling by 12.4%.

This also affected European markets where the FTSE 100 index in the UK suffered its worst drop in over a year by 2.5% in early trading, Germany’s DAX index also saw declines by approximately 3% and the CAC 40 in Paris closed 1.4% lower, reflecting the broader market apprehensions.

Our Perspective at Private Client Consultancy: A Temporary Blip

During this period of reported market turbulence, it is crucial to maintain perspective and not succumb to panic selling or doomsday journalism. Journalists love this sort of news as they can use emotive phrases and taglines with the main objective to obviously sell stories.

The current negative outlook being mentioned can be attributed to negative sentiments spurred by investment bank economists who believe the Federal Reserve has been overly restrictive with interest rates. This sentiment, rather than underlying global economic considerations, has fueled yesterdays (5th of August 2024) downturn. Only 24 hours later more sobering analysis and reaction from markets is taking place.

We believe that there exist several reasons not to expect a US recession, even with softening financial data.

  • The US economy continues to look in order, with no major financial imbalances that are evident.
  • Add to that fact that Central Banks use interest rate cuts to kick start an ailing economy, the Fed has plenty of headroom to do this.
  • Buyers will now see more value after yesterdays losing streaks and as interest rates are cut, yield investors will start to re-allocate from fixed income to dividend paying stock.

When inevitable market corrections occur these are typically short-lived and present valuable buying opportunities for savvy investors.

As we can already see after Monday’s apparent downfall of the global economy, the Japanese Nikkei 225 saw on Tuesday 06/08/2024 a big jump by 10.23%, it’s biggest gain in a single day, the FTSE 100, DAX and CAC 40 are also all showing early signs of recovery.

Clarifying Market Corrections vs. Bear Markets

It’s important to stress that this isn’t a bear market – it’s a one-day correction, of which there have been hundreds over time.

A bear market is defined as the period from a peak to trough, with at least a 20% decline in the S&P 500 (or equivalent) index price. The S&P 500 was down by 3% yesterday (05/08/2024), far from the 20% threshold that characterises a bear market.

This is why it is important to understand the potential recovery styles. There are two primary recession styles:

  • V-Shape Recovery: This occurs when the market quickly falls and then rapidly rebounds, forming a “V” shape on the chart. This type of recovery is characterised by a swift and strong return to previous levels. Currently, the market is showing signs of a V-shape recovery, as evidenced by the rapid gains seen in the Nikkei 225 and early signs of recovery in the FTSE 100, DAX, and CAC 40.
  • U-Shape Recovery: This occurs when the market falls, remains at lower levels for a period, and then gradually recovers, forming a “U” shape. This recovery is slower, with a more prolonged bottom before returning to previous levels.

Both U-shaped and V-shaped recoveries start with a sharp decline, but they differ in the recovery phase.With a V-shaped recovery, the economy quickly rebounds after a brief downturn. In contrast, a U-shaped recovery involves a prolonged period of economic stagnation at the bottom before a gradual recovery begins.

Historically we can compare these recoveries based on these historical occurrences:

U-shaped Recovery = The 1973–75 recession in the US

1973 75 recession

V-shaped Recession = The First Two Months of Covid 19

Stock market crash 2020

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Our Recommendations: Keep Calm and Look for Opportunities

In light of these insights and reports, we would recommend to adopt a calm and strategic approach during these volatile market periods.

Rather than instantly reacting to the current market fluctuations with emotion, consider the following actions:

  • Avoid panic selling
  • Look for unique buying opportunities, these moments of market corrections often present unique opportunities to purchase high-quality stocks at discounted prices.

We should remember the following as well:

  • Remember that the S&P 500 is still up by 9.35% YTD
  • The FTSE 100 is up by 3.35% YTD
  • The Nikkei 225 is up by 4.17% YTD
Understanding The Stock Market Situation

What to Watch For In The Coming Days

  • Federal Reserve Announcements: Future decisions on interest rate cuts will be crucial. Any signals of rate adjustments could stabilise markets or cause more fluctuations.
  • Global Economic Information: It will be important to monitor upcoming job reports, manufacturing data for signs of economic strength or weakness.
  • Corporate Earnings: Pay attention to earnings reports from major companies, particularly in the technology sector, to gauge their performance and outlook. The companies that have the most impact on global markets are the major 7 tech companies, Google, Apple, Amazon, Nvidia, Microsoft, Meta and Tesla.

Learning from History: Market Resilience

When analysing live events such as the one we are witnessing, we can look to similar occurrences that have happened in the past to determine potential outcomes.

  • Covid 19 Period 20/02/20 to 23/02/2020 the S&P 500 saw an initial drop of 34% only recover by 75% after 1 year
  • The Global financial crisis in 2008 which the S&P 500 saw a -57% Max Drawdown. After 1 year, it recovered by 69%, after 5 years it saw a growth of 178%.
  • If someone had invested £1,000 at the start of 1987, experienced Black Monday and then sold on 31 December 1987 they would have made 7%.

From a historical perspectives, when markets experiences these sudden sharp declines, after a certain period of time, there have seen strong-long term gains.

As we previously mentioned, this current market correction is not the beginning of a bear market but we are using the historical proof to highlight that even if the situation may seem bleak right now, more positive outcomes are just round the corner.

Conclusion

Market corrections are a natural part of the investment landscape and often pave the way for future growth.

By avoiding panic selling, not letting us succumb to our natural emotions/instincts and staying informed about key economic indicators, it is possible to navigate these periods of fluctuations with confidence.

Remember, history has shown that markets are resilient, and downturns are often followed by recoveries.

Let’s stay positive and focused on the long-term potential of our investments.

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