By Patrick Diamond, CFP®
The equity market has been on a strong upswing in 2024 (really it started back in late 2023) driven by, among other things, a strong economy and strong consumer spending, excitement around the rollout of new artificial intelligence technology and related implications for increased productivity, a strong labor market, and good corporate profits. The S&P 500 had seven new closing highs in July 2024 alone, and 38 new closing highs in 2024 year-to-date.[1] Real gross domestic product (GDP) increased at an annual rate of 2.8 percent in the second quarter of 2024, up from 1.4% in the previous quarter, indicating a growing economy.[2]
As happens from time to time, the stock market put the brakes on abruptly to start the month of August. As of August 4, 2024, The S&P 500 is down almost 6% from the recent highs. The Nasdaq 100 is down close to 11%. This type of volatility is not unusual and tends to spike in the August to October time period.[3] Market pullbacks and corrections are a feature (not a failing) of the stock market and should be expected from time to time. 94% of years have drawdowns of 5% or more going back to the 1920s.[4]
At the same time U.S. Treasury yields have dropped, sending the price/value of bonds higher. This tends to happen as investment dollars leave the equity market during selloffs and move into the perceived safety of bonds and government treasuries. This flow of money into bonds and treasuries, and the related price increase, is evidence that investment diversification works. As some investments in your portfolio zig, others zag. This is why we put our clients in diversified portfolios because diversification helps tamp down volatility in times like this August selloff.
In addition, we have a belief in leading with financial planning. As you may have heard us say before, the best financial advisors in the business lead with financial planning. This isn’t a coincidence. Our firm believes in two fundamental concepts: we always work in our clients’ best interests and every client should sit with us at least once a year to update their financial plan. If your financial plan is on track, you don’t need to stress over down markets or market selloffs. You shouldn’t get overly exuberant over big up markets either. Markets go up and they go down by their nature. Sometimes they even stay flat. What’s critically important is that you are on track to meet your savings and retirement goals. That is why we lead with financial planning.
The wonderful thing about how we build financial plans for our clients is that market up years and market down years get built into your plan projections and in the stress tests we apply to your financial plan. When our clients know their plan has been stress tested in over a thousand different market conditions (the good, the bad, and the ugly), they can rest easy knowing their finances are secure and that they’re on track to reach their most important goals in life.[5]
[1] S&P Global Market Recap (July 2024)
[2] Bureau of Economic Analysis (July 2024)
[3] Datatrek Research (July 2024)
[4] A Wealth of Commonsense Blog, Ben Carlson, CFA (August 2024)
[5] Please remember that past performance may not be indicative of future results. The information provided in this article is for general educational purposes only and is not intended to provide any investment, tax, or legal advice.