.png)
Over the past few weeks, global equity markets have experienced a pullback from their recent highs, or in some markets, their all-time highs. This pullback likely has several causes.
First, global equities, especially technology stocks, have been in a strong bull market since the Fall of 2022, with the Nasdaq doubling in value over that span. Markets don’t go up in a straight line and pullbacks and corrections during a bull market are common, to be expected, and can be considered healthy for equity markets.
Much of the Nasdaq’s success has been attributed to the excitement over Artificial Intelligence (AI), and the significant capital flooding into tech stocks has perhaps pushed valuations beyond what fundamentals might suggest. When situations such as this occur, it’s natural for a “reality check” and for prices to adjust. The AI story is far from over, but in the short-term, it’s no surprise that enthusiasm, and prices, have experienced a pullback.
Markets were already experiencing a modest pullback prior to the U.S. jobs report that came out this past Friday, but the report showed fewer jobs were added to the U.S. economy than expected and the unemployment rate increased from 4.1% to 4.3%. The results of the report raised concerns about a U.S. recession and that the Fed has waited too long to lower rates, causing the pullback to intensify. However, it should be noted the report showed jobs were added to the U.S. economy, just not as many as analysts had expected, and a substantial reason for the increase in the unemployment rate was due to new workers entering the job market. Recessions are usually preceded by substantial layoffs and while there were some, there weren’t as many as one might expect during a recession. So, we’ll have to wait and see how future employment readings go.
The events of the past few weeks have caused an influx of new money into U.S. and international developed market bonds, with prices rising significantly across the full spectrum of the bond market from short-term to long-term bonds. This highlights the importance of maintaining a diversified portfolio as assets classes and sectors of the financial markets come in and out of favor, taking turns providing growth and stability to a portfolio.
Other headlines may be contributing to short-term economic concerns and the subsequent pullback in global equity prices, but the headlines highlight the fickle nature of the stock market and the media. Prior to this latest pullback, the headlines were predominately positive with calls for continued growth in the U.S. economy, positive prospects for the job market, and an uptick for corporate earnings. However, due to a pullback in equity prices from all-time highs, and one disappointing jobs report, the sentiment of traders and the media has now shifted to one of fear.
The media and stock traders focus on short-term events. They feed off volatility and often overlook long-term fundamentals. And, despite the recent negative headlines, the unemployment rate is sitting at 4.3% (very low historically), the services sector, measured by the Services ISM Report, showed continued growth for the month of July, and according to FactSet, of the companies that have reported Q2 earnings to date, 78% have reported positive earnings surprises beating analysts’ expectations.
Whether the Fed has waited too long to lower rates is something that historians can debate with the benefit of hindsight, but to the long-term investor with a diversified portfolio, the impact of the Fed’s decisions, whatever they may be, will eventually fade. And this pullback, wherever it may end, will end. As prices adjust, so will valuations and sentiment, and buyers will once again enter the market. And, the cycle will repeat.
Regardless of the current news cycle, the long-term investor has the time and patience to ignore the noise and focus on the long-term prospects for the global economy and markets. History has shown us that ignoring the headlines and staying the course leads to the best long-term results.
If you have any concerns about your investment portfolio and recent stock market volatility, you should speak to a financial professional who can help you make informed decisions.
Tad Jakes, CFP®, EA, ECA