Stairs Up, Elevator Down (This is What Markets Do)
Feeling sick at the sight of his computer
He dodges his way through the Swanston commuters
Rips off his tie, hands it to a homeless man
Sleeping in the corner of a Metro bus stand, and he screams:
"I'm not going to work today
Elevator Operator (Courtney Barnett)
The old Wall Street phrase ‘Stairs Up, Elevator Down’ describes how the stock market gradually climbs higher over time (‘stairs up’) only to suddenly fall rapidly (‘elevator down’). This is because fear is more powerful than greed. The prospect of sustaining a big loss is more influential on human behavior than the joy of a potential gain. Although most stock trading today is executed by high-speed computers, the algorithms are created by humans, who are emotional. Here’s a quick timeline of events that I believe contributed to the recent wild swings (volatility) in the stock market:
Friday, August 2nd, 8:30 AM Eastern, the U.S. Bureau of Labor Statistics reports a weaker than expected jobs report. The U.S. economy grew by 114,000 jobs, far below the 185,000 expected by economists. In addition, the unemployment rate ticked higher to 4.3%, sparking fears of a recession.
Friday, August 2nd, 9:48 PM Eastern, CNN reports that U.S. war ships are headed to the Middle East as tensions rise between Israel and Iran following the killing of a Hamas leader in Tehran.
Saturday, August 3rd, 9:07 AM Eastern, Bloomberg reports that Warren Buffett sold half of Berkshire Hathaway’s Apple shares, raising his cash hoard to a record $277 billion. Investors fear, what does Warren know?
Sunday, August 4th, 7:48 PM Eastern, CNBC reports that Japanese stock market crashes 12% (nearly 20% in 2 days), as highly leveraged, trades get unwound, panic spreads globally, bleeding into U.S. markets.
This is what markets do. They go up gradually and they fall quickly testing our fortitude. Twenty three months ago, we were in the grips of the 2022 Bear Market. I wrote Short Term Pain, Long Term Gain (9/23/2022), reminding you that building wealth in the stock market is not free. There is a ‘fee’ we must all pay in the form of stomach-churning volatility. But as I reminded you then, it’s always temporary. Since that letter, the S&P 500 is up 40%! Keep this in mind the next time we’re in a bear market.
The stock market opened Monday, down more than 3%, which is rare. In fact, Bespoke Research pointed out that it was only the 20th instance in which the stock market (S&P 500) opened the trading session down more than 3%. Nobody knows what happens from here in the short run but historically markets rebound quickly. According to Bespoke, one month later, the market is up on average 4.18% and positive 73.7% of the time. And 3 months later the market is up 11.19%, with positive returns 89.5% of the time (see below). These are not predictions, but the odds are tilted in our favor.
source: Bespoke Research
The Federal Reserve has driven inflation down from a peak of 9.1% in June of ’22 to 3% today. Weaker jobs data and a slowing economy will lead them to reduce interest rates, likely next month. Goldman Sachs published a piece Market Monitor (8/2/2024) showing how markets perform once the Fed begins reducing interest rates. If we are not in a recession or heading into one (as I believe is the case now), the market climbs 14.5% in the year following the Federal Reserve’s first rate cut. If we’re in recession, or on our way into one, the market falls on average, 14.3%. Again, this is not a forecast, I’m simply providing historical context.
I believe one lackluster employment report after record job growth does not foretell a recession. If Israel and Iran were on the brink of war, oil would likely be over $100/barrel and not sitting below $80 as it stands today. Perhaps Warren Buffett was simply exercising prudent risk management because Apple represented a whopping 40% of his very large portfolio, or he’s raising cash to make a big acquisition. The panic selling in Japan appeared irrational, indicating to me that some large investors were over their skis, and forced to liquidate.
On July 16th, the stock market (S&P 500) reached an all-time high. Five days earlier, we reduced risk in client portfolios, and we reduced risk further on the 17th. On July 11th, twenty four days before the Japanese Nikkei crashed, we eliminated our exposure. Sometimes we get lucky. We prefer buying stocks when investors are selling—volatility is our friend. We took advantage of lower prices to buy more high quality names in healthcare and tech. We also added to our India position as we believe they will benefit as the West pulls away from China.
The most recent report from the Federal Reserve Bank of Atlanta projects our economy to be growing at 2.9% (8/6/2024). This is not indicative of an imminent recession. We are still growing jobs, but at a more modest pace. I advised in my last letter (America is Crushing It) that today’s higher rates would eventually slow the economy, which was the Federal Reserve’s intention to squash inflation. There is always a risk of recession, but today I interpret the data as a slowing economy, not one in reverse. So, enjoy the bull market while it lasts.
Let’s talk, we’re here to help.
Thank you!
-randy
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