Stock Market Insights: Up-downs – Building resilience on the field and in investing

BY JOE SHEARRER, a Vice President and Wealth Advisor at Fervent Wealth Management.

This week began the start of third grade tackle football for my son as a player and myself as a coach. For most players in our program, this is their first year playing tackle football. With that, the first several practices are spent teaching the fundamentals of the game. At the end of practice, I explained to the boys that we didn’t get through some of the drills I had prepared on my practice schedule because we had difficulty staying focused. I explained that this hurts the entire team because we need more reps and opportunities to learn the necessary fundamentals to succeed on the field. Because of their lack of focus and attention, they would owe me some updowns at our next practice.

“Up-downs” are a very difficult and challenging conditioning drill that help build endurance. At some point in a football player’s career, they will face up downs. In the process of reflecting on my day, I began seeing the parallels between the up downs that football players will face and up downs investors will face; they are inevitable.

Over the last couple of weeks, investors have had to experience the pains of a market pullback. During periods of low volatility, investors tend to forget that an inevitable pullback is on the horizon. When they occur, they tend to spark fear as waning optimism manifests into panic, as evident on the CBOE Volatility Index (VIX) or “fear gauge” on August 5, when it surged to its highest reading since March 2020.

While such sharp declines in equity prices are concerning, historical data on the S&P 500 index reminds us that dips, pullbacks and even corrections of 10% or more are a normal and healthy part of any bull market. On average, stocks experience a pullback of over 5% over three times per year and a correction of 10% or more around once per year — even in positive years. Expressing this data another way, 94% of years since 1928 have experienced a pullback of at least 5%, and 64% of years have had at least one 10% correction, according to LPL Research.

On Wednesday, the consumer-price index showed prices rose 2.9% in the past 12 months through July, below economists’ expectations of 3%. A day earlier, July’s producer-price inflation data had reassured investors by showing signs of moderating factory-gate inflation.

Investors were looking for inflation data that would land softly enough to remain confident of a likely September rate cut while allowing investors to push recession concerns aside. After Wednesday’s report, investors leaned toward a 0.25-percentage-point cut, rather than a half-point reduction, when the Fed meets next month.

We are approaching the time to consider slowly putting excess cash balances in portfolios back to work. I think bonds look more attractive than cash and historically stocks and bonds tend to earn higher returns than cash over the long term. I believe the most recent positive economic data and understanding that pullbacks are common should provide comfort to equity investors, allowing them to be patient, stay invested, and, most importantly, not to panic.

Up-downs in football are one of those drills you’ll run when you have the entire team together. They’re usually run team-wide simultaneously, as a team-building exercise as well. The idea is that players can motivate their teammates to keep going and push through a very tough physical and mental challenge. Though sometimes painful at the moment, I hope my players look back and see the benefit of up-downs in football and life.

Have a blessed week!

Joe

www.FerventWM.com