Market Drop Triggered by a Flurry of Worries Among Investors
You don’t need me to tell you the markets got off to a rocky start this month. Beginning August 1, Wall Street experienced a three-day rout that culminated on August 5 when the Dow Jones Industrial Average and S&P 500 index both had their worst day since September 2022.1
Although a strong rebound began on August 6 and was continuing as of this writing, the underlying issues behind the selloff are significant, and could potentially trigger more volatility in the months ahead. So, let’s take a closer look at these issues one by one.
First, the so-called Magnificent 7 tech companies that have been leading the bull market since last year have all recently been releasing their Q2 earnings reports. Although the reports show earnings are generally still strong, they also forecast lower earnings for next year.2 In other words, the market leaders are saying they see a slowdown coming, and that’s concerning for investors. To make matters worse in this area, one of the top companies in the artificial intelligence tech boom, Nvidia, recently announced they’re having problems with their next-generation chip.
Second, the big tech companies aren’t the only ones projecting a slowdown. Quarterly earnings reports from many companies in other sectors of the market are also guiding lower for next year, and a variety of recent economic data continues to indicate that an economic contraction is already underway. The latest jobs report released by the U.S. Bureau of Labor Statistics showed unemployment up to 4.3%, its highest level in three years.3 And although the inflation rate remains stubbornly stuck at around 3%, based on the latest estimates, the month-over-month headline rate from May to June edged lower by .1%, which has some investors starting to worry more about deflation.4
Eyes on the Election, Japan
The third issue weighing on investors was the sudden shift in momentum in the presidential race after Joe Biden dropped out and Kamala Harris became the presumptive Democratic nominee. The stronger likelihood of a Democratic win is concerning because Harris’s economic policies are, by all indications, in sync with Biden’s. Those policies include raising the corporate tax rate, which always gets investors worried that higher taxes will lead to lower profits.
Fourth, fears that the war in the Middle East could intensify increased when Israel took credit for the killing of Hamas leader Ismail Haniyeh in Iran. The ongoing war between Gaza is just the kind of geopolitical turmoil that can really shake up the markets when it suddenly escalates.
The fifth issue behind Wall Street’s rocky August start is probably the one with the greatest potential to continue impacting the markets going forward. While the US Federal Reserve and many other central banks around the world are either moving toward or already actively lowering interest rates to combat the slowing global economy, Japan raised their rates and announced they intend to raise them further. Their objective is to support their own currency, but the move came as a big shock to the global markets and played a major role in kicking off the recent turmoil.5
That leads us to the sixth issue increasingly worrying investors: the question of when our own Federal Reserve will, in fact, actively start lowering its benchmark short-term interest rate, which stands at 5.5%. At their most recent policy meeting on July 30, the Fed opted not to cut rates and said they would continue to review the data. That spooked investors because many fear the Fed may wait too long and start cutting only after the economy has already gone into a recessionary spiral.6
The bond market seems a bit more optimistic that a rate cut will come soon, possibly at the Fed’s next meeting in September. The interest rate on the 10-year government bond fell to 3.79% on August 5, its lowest level of the year so far – although it has since edged back closer to 4%.7
Your Portfolios
The good news is that the bond market is probably right, and the reality is that the only issue we know for sure might cause a continued headwind for the markets is the situation with Japan. The other issues could intensify and cause more market unrest, or they could ease up. Either way, as income investors you’re better positioned than most to avoid any major negative impacts on your portfolios – which, of course, is the whole point behind investing for income in the first place.
With that in mind, despite the recent volatility we are still on track with our portfolios to deliver an average income yield of 5-6%, net of fees, for the year, which of course is our goal. Going forward, those of you in our most conservative portfolios of bonds and bond-like instruments, may, depending on your holdings, see your values affected a bit by credit spread fluctuations once the Fed does start lowering rates, but the impact will likely be minimal. For those of you in our stock dividend strategies, if we do see more downward market pressure in the coming weeks and months, it may represent a good buying opportunity.
And, of course, for all of you, the best news is that no matter what happens going forward, your income return is unaffected – and if you’re reinvesting that income when the markets are down you are dollar-cost averaging your way to more and faster income growth in the future!
As always, if you have any questions, or want to discuss potential changes to your investment strategy, call our office at any time!
1“US Stocks Bounce Back After Global Market Sell-off,” Fox Business, Aug. 6, 2024
2 “Magnificent 7 Stocks Slide; Valuations Looking More Interesting,” Morningstar, Aug. 7 2024
3 “US Economy Added Just 114,000 Jobs Last Month,” CNN.com, Aug. 1, 2024
4 “Latest Inflation Statistics,” Bankrate.com, July 11, 2024
5 “Global Stock Markets are Sliding as Japan Suffers Biggest Fall Since 1987,” Business Insider, Aug. 5, 2024
6 “July 2024 Fed Meeting: Rates Remain Steady for Another Month,” JPMorgan.com, Aug. 1, 2024
7 Marketwatch.com
Investment Advisory Services offered through Sound Income Strategies, LLC, an SEC Registered Investment Advisory Firm
