August is living up to its reputation as a tough month for stocks. However, amidst the volatility, there are indications that this challenging period might also present an opportunity for investors.
Last week, the stock market witnessed a relatively dull performance. While the S&P 500 index experienced a minor decline of 0.3%, the Dow Jones Industrial Average managed to register a modest gain of 0.6%. These numbers, however, overshadow the underlying volatility that was evident in the tech-heavy Nasdaq Composite, which suffered a significant drop of 1.9%. In fact, the Nasdaq has plummeted by nearly 4.9% since the beginning of August.
Reasons for Concern
Several factors have contributed to the anxiety in the market. Moody’s decision to downgrade bank credit ratings and the uncertainty surrounding the Federal Reserve’s approach to interest-rate hikes have been key concerns. In addition, consumer and producer inflation readings suggest that the phase of disinflation is coming to an end. Furthermore, the dominance of a select few stocks, such as Apple (AAPL), Microsoft (MSFT), and Nvidia (NVDA), in driving the bull market raises questions about its sustainability.
A Healthy Market
Amidst these developments, David Donabedian, Chief Investment Officer at CIBC Private Wealth US, emphasizes that the current market pause is indeed a positive sign. He distinguishes it from the rally earlier this year that was primarily fueled by a handful of tech giants. According to Donabedian, this is indicative of a healthier market environment.
In conclusion, while August has been challenging for stocks, it also presents an opportunity for investors. The market’s pause and the shift in stock performance signify a potentially positive turn of events for astute investors.
Market Analysis: A Choppy Week for Stocks
The past week in the stock market was marked by choppy and volatile trading sessions, resulting in false breakouts and aborted breakdowns. This created a lot of noise without offering much valuable information, mainly because trading volume tends to be low in August. However, this turbulence was necessary for the market to sustain its upward momentum.
According to Frank Cappelleri, founder of CappThesis and a respected market technician, many investors are currently adopting a wait-and-see approach. This cautious stance has allowed for the development of more constructive bullish patterns, indicating that the market may have the potential to continue its upward trajectory.
While it may take some time for these patterns to fully materialize, this holding pattern provides an excellent opportunity for investors to assess and rebalance their portfolios. It is advisable to consider selling stocks that have experienced significant gains while considering investments in sectors that have been relatively overlooked. Two sectors that come to mind are healthcare and utilities.
Despite the overall bullish sentiment in the market this year, the Technology Select Sector SPDR exchange-traded fund (XLK) has surged by an impressive 34%. In contrast, the Health Care Select Sector SPDR ETF (XLV) has remained relatively flat, and the Utilities Select Sector SPDR ETF (XLU) has experienced a decline of 8.4%.
This divergence presents an opportunity for investors to consider adding healthcare and utilities stocks to their portfolios. By capitalizing on sectors that have been less loved but show potential for growth, investors can take advantage of the current market conditions and strategically position themselves for future success.
The Potential Benefits of Recession
Even though there are skeptics on Wall Street who believe that a recession is unlikely, it is still important to exercise caution during these times. The Federal Reserve has increased interest rates by 5.5 percentage points since March 2022, and the full impact of these hikes takes time to manifest in the market. The yield curve, a trusted predictor of recessions, remains significantly inverted. While the idea of a recession may seem alarming, it also presents opportunities.
A recession can serve as a catalyst for a resilient and long-lasting bull market, according to Donabedian, an expert in the field. Although it isn’t yet clear whether we have entered a recession, it is crucial to consider the potential benefits that can arise from such an economic downturn.
So, rather than shying away from the idea of a recession, it is worth exploring how this challenging phase can pave the way for new opportunities and growth.