Volatility Returns

“I beseech you, in the bowels of Christ, think it possible that you may be mistaken.” – Oliver Cromwell

Hi all,

There has certainly been a change in tone in the stock market over the last three weeks and for the first time in quite awhile, some things that didn’t matter, now do.

1. Top Heavy Concentration of the S&P 500.

2. With everything nearing all-time highs, why do the negative vibes persist? Adjusted for inflation, households haven’t seen much change in their overall net worth.

3. Valuations are stretched.

4. Sentiment has gotten frothy and investors gone “all-in”.

5. Housing is finally starting to come back to earth (in some places).

Long time readers will know that we’ve been expecting the market to “come to its senses” since October of last year.  We saw a rotation into small cap companies during Q4 of 2023, and have maintained our small cap bias, but the small caps have lagged substantially against the flavors of the month (semiconductors, large cap technology companies, AI darlings).  I can’t tell you how many times someone has called the office wanting to ditch diversification because momentum stocks were the only game in town.

Well, in July alone, the Russell 2000 is up 11%, while the tech heavy Nasdaq 100 is down 3.5%, with still a week to go.  If you want to try and sell all your tech stocks and move into unloved names (real estate, utilities, energy, GASP!), be my guest.  But you might end up chasing your tail.  We feel the most prudent course of action is to simply view this pullback as serious, but one that needs to occur in order for rationality (and fear) to come back into the stock market. August is generally a weaker month, so we could be in for a few more surprises along the way, but regardless of where this pullback stops, we will likely view it as a buyable dip as long as the bias of the federal reserve remains toward cutting interest rates this year.

Buckle up, and please keep your hands and feet inside the ride at all times.  Try to remember that the S&P 500 is up 56% over the past 20 months.  What we’re going through now is normal, the speed and magnitude of the gains over the last several years wasn’t.

– Adam