After a rally of over a year and a half, volatility has returned to the markets. Since mid-July’s all-time high, the S&P 500 has lost -8.5% and the tech-heavy Nasdaq 100 has retraced -13.4%, entering into correction territory. This sudden downturn has left many investors feeling blindsided and uncertain. Let’s analyse the causes behind this sell-off and reassess our strategy.
Syfe’s managed portfolios remain resilient
Despite the recent market sell-off, our managed portfolios have demonstrated resilience. The diversification built into the Core Equity100 portfolio has proven beneficial during this market downturn. From July 1st to August 5th, the Core Equity100 portfolio’s return was -5.06%, outperforming the benchmark MSCI World Index. Notably, the portfolio’s drawdown was only half that of the Mag 7 stocks.
Source: Bloomberg, Syfe Research, as of August 5, 2024. Total returns are in HKD, unhedged. Magnificent 7 returns are calculated using the average return of Nvidia, Microsoft, Apple, Alphabet, Amazon, Meta, and Tesla during the specified period.
Meanwhile, our Income+ portfolios performed well during the volatile market conditions, benefiting from the lower interest rate environment. Income+portfolios achieved a positive return of +2.3%. The portfolios are poised to continue benefitting from Fed’s recent policy shift to reduce interest rates from as early as September. This reinforces the importance of diversifying your investments beyond equities to navigate various market conditions.
Source: Bloomberg, Syfe Research, as of August 5, 2024. Total returns are in HKD. Income+ returns are as of 5 August 2024.
What drove the stock market sell-off?
Several reasons contributed to the current stock market decline:
1. Overcrowded Trades, Softer Earnings: Fueled by the Artificial intelligence(AI) boom, investors flocked to AI-related companies. The “Mag 7” seen as AI beneficiaries, significantly outperformed other companies. This has resulted in an unprecedented concentration of mega-cap tech names, representing more than 30% of market cap indices such as the S&P 500 and Nasdaq 100.
Consequently, such overcrowding can have an amplified impact from any negative news. For example, the mixed bag of earnings this quarter led to an average 20% decline of the Mag 7 from their peak. This dragged down the S&P500 & Nasdaq 100 and led to sectoral rotations in July, followed by a broader sell-off lately.
2. Recession Fear: The weaker-than-expected July jobs report, showing slower payroll growth and an uptick in unemployment to 4.3% in July from 4.1% in June, has drastically shifted the economic narrative. The optimism of a “no-landing” scenario in April has now turned to concerns of a potential recession.
Diving deeper into the unemployment data, more than 70% of the increase in July came from temporary layoffs. Historically, temporary layoffs have not been a good recession indicator. Growth, hiring and inflation are cooling but not falling off a cliff. The economy is normalising back towards the long-term trend of around 2% growth.
3. Unwinding of JPY Carry Trade: JPY carry trade has been a popular strategy over the past two years. For those who are unfamiliar with carry trades, the trading strategy involves investors borrowing in JPY, taking advantage of near-zero interest rates, to invest in higher-yielding assets abroad.
However, with the Fed expected to cut interest rates and the BOJ to raise them, the JPY has strengthened against the USD. This has prompted investors to sell their foreign investments to repay JPY loans, contributing to the global stock selloff.
Demystifying stock market sell-offs
Stock sell-offs are actually more common than you think. The average yearly drawdown since the 1920s is -16%. Two-thirds of the time, there has been a double-digit correction. Despite various crises over the years, the stock market has consistently delivered strong long-term returns.
Rushing to sell your stocks during a down market may lead you to miss the potential recovery. In fact, 50% of the stock market’s best days occur during bear markets. If you miss the 10 best days over the past 30 years, your return would be cut in half. Miss the best 30 days, and your returns would be reduced by a staggering 83%.
Notably, following yesterday’s volatile markets, there are signs of market stabilisation. As of this writing, the Nikkei 225 has rebounded by 9% after a 12% decline, and US index futures are also showing positive movement.
How to navigate a stock market sell-off?
- Keep emotions in check
During a market sell-off, you may experience a range of intense emotions. Seeing your investments in the red can lead to stress or regret for not selling earlier. However, these emotions can drive irrational actions. It’s crucial to remain calm and remember that time in the market beats timing the market.
- Review your investment portfolio
For those already fully invested, this is a great time to review your portfolio and realign it with your long-term goals. Given the concentration risks in the market, especially in growth stocks, it’s prudent to rebalance your exposure to these sectors and employ a more globally diversified equity portfolio strategy. An option like Syfe’s Equity100portfolio provides a blend of growth, value, and defensive investments, helping you navigate market corrections more effectively.
- Use the sell-off to your advantage
Market sell-offs are not necessarily bad. In fact, these corrections can be healthy, resetting stock valuations and investor expectations within a longer-term market advance.
If you are sitting on extra cash, such times could be opportunities to invest. For those concerned about timing the market, consider dollar-cost averaging. This strategy involves investing a fixed amount over time to cushion the impact of market fluctuations.
- Diversify by investing in bonds
As the Nobel laureate Harry Markowitz famously asserted, diversification is the only free lunch in investing. Bonds can buffer the downside risk of an equity portfolio while providing income.
As the Fed moves to cut rates, interest rates are likely to drop further. For instance, the 10-Year Treasury yield has already moved below 4%. Bond prices typically rise when interest rates fall. Investing early can allow you to enjoy potential capital appreciation on top of the income you receive. This represents an attractive opportunity for investors to consider diversifying their equity portfolios by investing in bonds
Syfe Income+ offers investors a diversified bond portfolio, with an average credit rating of investment grade and a yield to maturity of 6.1% to 7.0%, potentially providing equity-like returns but with lower volatility.
For those with shorter-term cash needs, now is the time to lock in cash instruments with longer terms, such as 6-month, as short-term rates are poised to decrease along with Fed rate cuts.
Conclusion
Stock market sell-offs are normal and can even present opportunities. By staying calm, diversifying your portfolio, and potentially adding bonds, you can not only navigate this volatile period but also emerge stronger on your path to financial success.
This article is for informational purposes only and should not be viewed as financial advice. It is not meant to market any specific investment, or offer or recommend the purchase or sale of any specific security. All forms of investments carry risks, including the risk of losing all of the invested amount. Such activities may not be suitable for everyone.Past returns are not a guarantee for future performance. Investors should consider his/her own circumstances. The information or advertisement contained herein does not constitute an offer, any solicitation, invitation or recommendation to engage in any investment activities.
