After a strong market rebound in July, August turned out to be a down month for the stock markets after Fed Chair Powell’s remarks at Jackson Hole. SPY is down 5.8% in the past 4 trading days and down 4.2% for August.
Most economic indicators are actually not bad. The energy price is coming down (in the USA). Job markets remain very strong. July inflation numbers are good. Q2 earnings reports are generally better than expected. The main concern is that the Fed is going to raise interest rates higher and keep it there to tamper inflation.
Personally, I am not too worried about it. The reality is that the stock indices have come down more than 20%. Historically, if people were investing at 20% discount from the all-time high, their long term return on a broadly diversified portfolio would be alright. If interested, you can check out this tool to see the historical return data. People might argue that all time highs we observed in 2021 were a huge outlier and even a 20% discount would still be too expensive. I don’t disagree with that. But I also think pulling out of equity completely is riskier than having some exposure as investors have to have a strategy to get back into the market to not have their funds being eaten away by inflation. But the study has shown that for investors who missed the 20 best days of the stock market from 1999-2018, their return is essentially negative. Market timing is kind of impossible if I have to ensure my strategy covers the best 20 days out of 20 years. Instead, it’s a lot easier (and sensible) to continue to sit on my index portfolio and brace for the crazy volatility in the upcoming months.