I love roller coasters, but last week was a little bit much. After closing July up over 1% for the month, and over 15% year-to-date, the index dropped steadily for three straight days, then rebounded slightly on Tuesday. The index dipped again on Wednesday before climbing back on Thursday and Friday. To summarize, it was up, down, up, down, up, down, up. What in the world triggered all of this volatility?
On August 1, the Friday downturn that started this ride, the jobs report was released. It showed the US had added fewer jobs than expected, and also revised June’s jobs downward. These two numbers pushed the unemployment rate up to 4.3%. Traditionally, a significant increase in unemployment is considered an indicator of an imminent recession. Weak earnings reports from Amazon and Intel added fuel to the fire, and stocks continued to fall on Monday.[1]
By Tuesday, the market reflected on the fundamentals: company earnings, balance sheets, and other economic data, including the fact that over 100,000 jobs were added in July. If a recession is two consecutive quarters of negative growth, adding that many jobs is hardly reason to believe the sky is falling.
We continued the roller coaster on Wednesday, before the initial jobless claims report was released on Thursday. This report shows the number of new unemployment claims across the US, and it was lower than expected. In fact, it was the largest drop in claims in almost a year.[2] Since the sky didn’t seem to be falling after all, the markets rose Thursday and Friday, recovering some of the lost ground.
If the volatility of the last 10 days has made you a bit queasy, don’t pull your money and put it in your mattress. Instead, think first of how long you have until you need the money. This can vary by account. Maybe your retirement money isn’t needed for 20 years, but the college fund will be needed in five.
In general, if you are more than 10 years from your goal, you should have the time to invest aggressively, and weather the ups and downs. Depending on your ability to put emotion aside, you may want to consider taking risk off the table somewhere between five and ten years from your goal. And if you’re in retirement, a shift to a distribution strategy, that helps to insulate you from the regular drops in the market, is usually appropriate.
The simple truth is that, while you are accumulating money, market downturns are awesome. You’re buying stocks on sale. And since you’re buying the same dollar amount, you’re buying more stock at a lower price.
Your action item is to check the hoses to your washing machine. Even if you’ve upgraded to stainless steel hoses, these should be replaced about every five years.
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CovingtonAlsina is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.