The leading U.S. stock market index, the S&P 500, ended the first week of August nearly unchanged, masking a week of significant volatility. The S&P 500 experienced both its highest and lowest points in the last 18 months, serving as a reminder of the unpredictable nature of the stock market. Despite a 0.5% gain on Friday, the index closed the week down by a mere 0.05%, slipping from 5,346.56 to 5,344.16.
The S&P 500 has now recorded its fourth week with less than a 0.1% movement in the past two years, but this calm exterior belied the major turbulence underneath. On Monday, the S&P 500 plunged by 3% due to global concerns over a potential stock market crash, partially triggered by worse-than-expected U.S. monthly unemployment data. The market’s “fear gauge” spiked to a level not seen since March 2020, reflecting investor anxiety. However, the index quickly rebounded as secondary employment data alleviated fears of an imminent recession.
“Investors have become quite reactive following a strong and steady period for the market,” observed Mark Hackett, Nationwide’s head of investment research, in an email commentary. This sentiment echoed across the other two leading American equity indexes. The Dow Jones Industrial Average and the Nasdaq Composite both recovered most of their losses from earlier in the week. The Dow ended the week down 0.2%, while the tech-focused Nasdaq booked a 0.6% loss for the week.
The week was marked by a swift shift in market narratives. As Raymond James’ Chief Investment Officer Larry Adam wrote to clients, “Market narratives can change quickly, but they are not always right.” This week’s events highlighted the speed at which market sentiment can shift and the difficulty of predicting its direction.
The volatility was initially sparked by last Friday’s jobs report, which triggered recession fears based on the Sahm indicator, a metric that tracks changes in the unemployment rate. Compounding these concerns were signals from the Bank of Japan, traditionally known for its conservative monetary policy, indicating it might raise interest rates to stabilize the yen. This combination of factors led to a flash crash in the markets, with investors fearing long-term consequences.
Globally, stock indexes remain depressed from their all-time highs reached earlier this year, even after a brief recovery. Europe’s Stoxx index is down 5% from its May peak, the S&P 500 is down 6% from its July apex, and Japan’s Nikkei has fallen 17% from its July high. This underlines the ongoing uncertainty and the potential for further declines in the stock market.
Despite the bounceback, the threat of a recession looms large. Goldman Sachs and JPMorgan Chase have both estimated the odds of a U.S. recession at 25% or higher over the next year. This outlook suggests that further stock losses could be on the horizon. However, it is also important to note that stock market declines are a normal part of the journey toward long-term gains.
Between 1928 and 2019, the S&P 500 experienced an average annual drawdown of 16%, according to Bespoke Investment Group. In comparison, this year’s drawdown, defined as an asset’s steepest decline from its all-time high, stands at just 8.5%. This is relatively moderate and does not set off major historical alarms.
“While sell-offs are never comfortable, this year has been fairly calm from a historical perspective,” remarked Larry Adam. His assessment highlights that while the recent market volatility has been unsettling, it is not unusual in the broader context of market history.
As the market continues to navigate these turbulent waters, investors are reminded of the inherent unpredictability of the stock market. The past week’s fluctuations serve as a potent reminder that market stability can be fleeting, and the road to long-term gains is often paved with short-term volatility.
