Market turbulence, like what we have seen in August, can stir up a lot of emotions, but times like this also offer an opportunity to reflect and learn. This recent period of volatility is a good reminder of why it’s important to stay the course and remain invested through both good markets and bad — particularly if your circumstances haven’t changed drastically.
When markets are volatile, especially during a downturn, emotions tend to run high. The fear of losing money often outweighs the potential of future gains, leading to decisions that might not align with your long-term goals. The first half of this month has been a perfect example, so I thought it would be helpful to highlight some of the factors that caused these market moves.
Economic reports are like a health check-up for the economy, and investors have been keeping a close eye on these because they may signal what the Federal Reserve might do next. Ever since the Fed paused its rate hikes, there’s been speculation about when they might begin cutting them—and whether the U.S. economy is headed for a soft or hard landing. Earlier this month, weaker-than-expected employment data spooked investors into fearing the latter, and this was reflected negatively in the markets.
At the same time, we were in the middle of earnings season, which is always a critical time for the markets. Investors look at not just how companies performed last quarter, but also what they’re forecasting for the future. This is likely why we saw some big names experience volatility recently, despite reporting decent results, and the combination of uncertain economic data and mixed earnings reports added to the overall market unease.
Adding to these factors, and what I found particularly interesting, were the consequences of the Bank of Japan (BOJ) raising interest rates. Japan has kept interest rates very low for years, allowing investors to borrow money in Japanese yen and invest it in assets with higher returns elsewhere—a strategy known as the carry trade. However, when the BOJ raised interest rates a few weeks ago, investors began unwinding these carry trades, triggering a global market sell-off.
All these factors — economic reports, Fed speculation, corporate earnings, and international developments — played into the market’s recent swings. But here’s the key takeaway: while these events can cause short-term volatility, they are part of the natural ebb and flow of markets. To put things into perspective, the S&P 500 had one of its worst days of the year on Monday, August 5th, 2024, only to record its best day of the year on Thursday, August 8th, and last week ended up being the best week of the year for all indices (S&P, Nasdaq, and the Dow). Timing the markets is incredibly difficult, and if you had followed the herd and liquidated assets two weeks ago, you might have missed out on the recovery that happened just a few days later. As we often say, the best course of action is to develop a well-diversified investment plan to help mitigate some of these volatile times. If your goals remain unchanged, consider staying invested to better your chance of achieving your stated goals.
