What’s Behind the Recent Market Sell-Off?

Vice President, Investment Services

As an investor, you may be concerned with the recent market sell-off and wondering what, if anything, you should do. This article will provide context for how we are interpreting what is going on with the market. 

Current Status

As the first half of the year came to a close, it looked as though 2024 was setting up to be another great year for stocks. The month of July started off the same, with the S&P 500 sitting on a year-to-date gain of over 18% by mid-month. 

Then, the volatility started. 

It began to take hold as investors, realizing that the prices of many of the leading Technology and Communication Services companies were getting too lofty, started taking profits in these stocks and reallocated into other areas of the market where they felt there was greater value. This period of “sector rotation” lasted for the next couple of weeks. During this time, the tech-heavy S&P 500 fell about 3%. 

The market then began to slide further, culminating with a 4% drop on August 5. By the close of business that day, the market had fallen 8.5% from the all-time high posted just a few weeks ago. 

What caused the most recent decline? 

Even though the most over-priced sectors of the market had already begun to sell off, many stocks were still trading at prices perceived to be too high. At the same time, investors around the world started to become concerned about the potential for an economic recession in the U.S. As a result, foreign investors began selling stocks at a rapid pace, which then spread directly into the U.S. markets, with all major indices being affected. 

Ultimately, this creates a great deal of angst among investors (both individual and institutional), only made worse by the news we read, see and hear in the major media outlets. 

Considering this, several questions may come to mind. 

Are we heading into a recession? 

It’s too early to know the answer to this question. Because economic data is rearward looking, predicting the timing of when one will begin is very difficult. We usually can’t confirm a recession until it is well underway. The important thing here is to remember that recessions are a very normal part of the economic cycle. Additionally, recessions often lead to periods of strong economic growth. 

When is the market sell-off going to end? / How bad is it going to get?

Again, we don’t know. In fact, no one really knows. Market volatility generally continues until investors feel that any excesses have been worked out. In the meantime, we caution our clients not to get too caught up in the media hype (negative news sells). Like recessions, corrections are a very normal part of the market cycle. They help restore a more healthy, balanced market. 

Should You Sell Your Stocks? 

Do not let short-term market volatility scare you into thinking that the markets are on the verge of an apocalyptic collapse. History has taught us that markets recover. Again, volatility is normal. Whether economics, politics, natural disaster, or any other, there is always the risk of volatility. The best thing you can do is plan for it. In fact, it’s in these periods of volatility that investors can identify and take advantage of opportunities. 

Sound financial plans are created knowing that there will be market volatility, and an appropriate risk tolerance has been established with this in mind. Selling stocks during periods of downward volatility can actually carry a greater level of risk. This is because it is very difficult to know when the market recovery will begin, and being out of the market during the initial stages of the recovery can  have a significant negative impact on your portfolio’s long-term returns. 

Finally, it’s important to keep everything in perspective. Even though the market is down 8.5% from its all-time high, it’s still up almost 10% year-to-date. 

If you have any questions about your risk tolerance and how it factors into the development of your investment portfolio, please reach out to your planner.