Read here what GSB Wealth’s Daniel Clarke had to say about this week’s latest stock market updates.
In this article, we will discuss:
- Why market downturns are completely normal
- The potential for interest rate cuts
- Putting recent economic numbers in perspective
- The importance of focusing on time in the market, not timing the market
Up until last week, 2024 had been a largely positive year for investors. Despite facing various challenges, including geopolitical tensions and higher-than-expected inflation, the global stock market had risen 14.87% in just over six months, continuing the positive momentum from the latter half of 2023.
Markets panicked on Friday, however, when the US released labour market data which came far below investors’ expectations. The report revealed that just 114,000 new jobs were added, falling short of the 175,000 forecasted by analysts. Coupled with underwhelming earnings reports from Amazon and Intel, and the S&P 500—a key index comprising 500 of the largest US companies—is now down 8.49% from its July peak.
This shock has been felt across the world due to the importance of the US markets. The adage ‘when the US gets a cold, the world sneezes’ rang true once again, with significant declines across Europe and Asia. As is always the case, the media pounced on the news, releasing a barrage of fear-inducing articles which have no doubt spooked many investors. In this article, we will outline several reasons why investors should not panic and instead focus on the importance of time in the market, not timing the market.
Market downturns are completely normal
Contrary to sensationalised media narratives, stock market declines are a relatively common occurrence and are part and parcel of investing in the financial markets. The stock market experiences a 10% drop on average every 16 months, meaning this current dip is nothing out of the ordinary, especially given the strong performance of stocks recently.
In the nine months prior to the recent peak, the US stock market surged by an impressive 29.60%. This compares to the average annual return of 10.50% over the past 50 years. The index achieved this return with minimal market downturns and quick recoveries. The largest downturn in this nine-month period was just 5.46%.
Given the incredibly strong performance of markets towards the end of 2023 and into 2024, a stock market correction was expected at some point in the near future. Investors with a low-cost, globally diversified portfolio of stocks and bonds will have still achieved a large gain over the past 12 months.
The downturn increases the likelihood of interest rate cuts
One frustration for investors this year has been the Federal Reserve’s (Fed) reluctance to cut interest rates, which remain at elevated levels not previously seen since 2001. The weaker-than-expected labour market numbers will ramp up the pressure on the Fed to lower interest rates amid fears of a recession.
Lower interest rates have the potential to benefit investors in a number of ways:
- Firstly, reduced rates make it cheaper for companies to borrow, encouraging expansion and increasing demand for employees. This, in turn, stimulates economic growth.
- Lower rates also increase borrowing amongst individual consumers, who may decide to purchase the house or car they previously couldn’t afford due to higher borrowing costs. Additionally, rate cuts by the Fed will be followed by banks cutting the interest rates offered to customers. This gives consumers a further reason to spend as opposed to save.
- For investors with an allocation towards bonds, lower rates increase the value of existing bonds that pay higher interest rates compared to newly issued ones with lower interest rates.
With US interest rates at 5.50%, the Fed has a lot of room to reduce rates, which will provide support to the markets. There is widespread belief now that the Fed will begin their rate-cutting cycle next month in September, potentially giving the market further momentum.
Putting the numbers in perspective
Whilst the number of new jobs added in the US was below the expectations of analysts, it is worth noting that the figure was still positive, in spite of a high interest rate environment.
A further talking point has been the unemployment rate in the US increasing to 4.30%. This is still significantly lower than the long-term average. Digging into this number a little deeper, the increase in the unemployment rate is due to a larger workforce, not a decrease in the total number of jobs, which would have been a more concerning indicator.
Conclusion
Whilst market declines are never a pleasant experience for investors, they are completely normal and can, in fact, be a sign of a healthy stock market.
Looking back on previous market data, the optimal times to invest were immediately after market declines. The Great Financial Crisis of 2008 and the Covid-19 outbreak of 2020 presented two of the best times to enter the market, with the shares of many great companies available at a substantial discount. If you believed the financial media at the time, however, you would have thought the opposite and would have missed out on the substantial gains that followed.
Investors should look at market declines not as a reason to panic, but instead as an opportunity to buy into the market at lower prices. Emphasising the importance of time in the market, not timing the market, can lead to better long-term returns and a more stable investment strategy.
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Disclaimer
The views and opinions expressed should not be construed as investment or financial advice. The information contained is for educational purposes only.