Image by Jezael Melgoza
The market has taken a downturn today. If you, like many who follow us here, are saving for retirement, you likely have a long-term investment time horizon. Past downturns, including the 2020 Covid recession, the 2008 financial crisis, and the 2000 dot-com bubble burst, saw recoveries and continued growth afterwards. Those who held onto their stock investments through those downturns experienced the 7-10% average annual growth that the US stock market and S&P 500 have offered over the past century.
What caused today’s volatility?
- The US Federal Reserve (the Fed) has been hinting for months that it might start cutting interest rates soon, a move that can fuel economic growth by lowering the cost of borrowing, but has held off on doing so as it tries to rein in inflation. It has described its goal as a “soft landing” - one where high interest rates slow inflation and economic growth without triggering a downturn - a difficult feat to accomplish. Last week the Fed continued to hold interest rates steady rather than announcing an interest rate cut.
- US job growth has been strong over the past few years, with historically low unemployment. A new jobs report released Friday showed a sudden shift in that trend, with a slowdown in hiring and unemployment at its highest rate in three years. This made some investors jittery as they wondered whether the Fed should have cut interest rates sooner. Unemployment is still quite low in historical terms.
- Japan’s stock market had its biggest ever single-day decline today, triggering ripple-effects around the world. Investors had been taking advantage of negative interest rates in Japan to borrow money there and invest it in the US stock market, a tactic known as a carry trade. The country surprised investors by raising its interest rates last week, leading some of those doing carry trades to sell in the US market.
- Unprecedented growth in the stock market in recent years has been driven most recently by breakthroughs in artificial intelligence, or AI, technology that has changed the way entire industries, especially the internet industry, expect to operate moving forward. Seven companies have driven much of that value growth: NVIDIA, Microsoft, Apple, Google parent Alphabet, Amazon, Facebook parent Meta, and Tesla. These have become known as the Magnificent Seven.
- As AI stocks have skyrocketed in value, some investors have questioned whether there is substance behind the hype. Warren Buffett’s Berkshire Hathaway reported this morning that it has sold half its stake in Apple. It started investing in the company in 2016 and had accumulated a 6 percent stake. Apple has had an enormous run recently. Profit taking to diversify significant concentrations is a common playbook for Berkshire. Apple is still one of Berkshire's largest positions. But for years Apple shares have risen or fallen based on whether Berkshire Hathaway was buying or selling Apple stocks.
- NVIDIA announced a 3-month delay in shipments of its newest AI chip this morning, triggering a 10% decline in its stock value. It somewhat recovered as investors became less concerned about the cost of the delay through the course of today.
- The Institute for Supply Management reported midday today that purchasing managers see business expanding. This is a good sign for the fundamentals of the economy, which can be divorced from the stock market when traders get jittery. Traders did seem to take note as the markets recovered somewhat through the day.
The S&P 500 is still up over 9 percent for the year. It is impossible to predict what the coming days will bring, but if history is any indicator, regardless of how long these stock market twists and turns continue, staying put and holding onto a broadly diversified stock portfolio can lead to good outcomes for decades to come.
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