Mike Giordano, CFP^®
michael@wwmgreenville.com

Markets move for all kinds of reasons—fundamentals, technicals, sentiment, positioning, They have moods just like each of their participants. So, sometimes they’re quite gloomy. And other times, they’ve got all the exuberance of a 6-year-old.

This year started out with the consensus view we’re headed for an imminent recession. The Fed’s rate hikes would eventually cause the economy to roll over. So, sentiment was bearish and stocks heavily out of favor.  Cash and money market funds were in vogue.

But, early economic data January and February showed falling inflation and continued resilience in the job market. That caused money to flow back into stocks. As the markets drove higher, the narrative started to shift. AI became the latest buzzword. It seemed as if every company was using artificial intelligence to talk about future growth.

Our software is incorporating AI.

Our logistics is powered by AI.

Our sluggish peanut butter/toothpaste/popcorn sales are all going to get a boost from AI.

The changing narrative drove even more money into stocks. When the regional banking crisis in March turned out not to be a full-blown crisis, it was game on! Soon, there became fewer calls for a recession and more for a soft landing. I heard some strategists argue we’re no longer in the late innings of the last cycle. We’re onto a new economic cycle.

In truth, we don’t know. The point here is simply the power of the price. If prices are rising, investors can come up with all kinds of justifications for the run. Same is true if prices are falling. 

If the economy would have fallen out of bed earlier in the year, the markets would most likely have fallen with it regardless of the already bearish positioning.

But, when the data proved better than expected, everything remotely close to being a positive became a reason to plow higher. Then higher still.  

Then the calendar turned to August, a seasonally-weak period for the markets as light trading volumes can lead to big swings. And, we’ve had the perfect storm for a rethink. Stock valuations are relatively high and new catalysts are fading with earnings season mostly behind us. Meantime, the U.S. Treasury has announced plans to sell an additional $274 billion worth of bonds to restock its general account.

That has helped drive up yields, which are the financial gravity of the markets. The higher treasury yields go, the more pressure it puts on stocks and other growth assets.

So what should you make of this month’s summer swoon? It’s a necessary pullback to reset expectations that had gotten a bit out-of-hand in recent months. Whether it becomes something more alarming will depend on the data. So far, there’s been little sign the economy and the job market are in significant decline. 

So, look at this pullback as a great way to flush out some of the excess froth. Look at it as a chance to reset your own expectations. If you’re a bond investor, you’ve got better opportunities to pick up capital gains now than you did two months ago. Equity prices are also better for some of the biggest names.

If you’d like more specific ways to take advantage of today’s market conditions, reach out.

Mike on the Money on WYFF News 4

This week, we looked at the Golden Years! We offered insights for retirement planning. Steps to take once you’ve begun to think about your end date plus what to do after your walkaway day.