Avoid the Crowd | The Investors Edge
By John Stewart, chief investment officer at Farmers Trust Co.
Week in Review: Volatility Returns
That rotation in stocks I talked about in the last episode of Investors Edge has continued to cause gyrations in stocks. The high-flying, tech-heavy NASDAQ stock index is down roughly 8% in the past two weeks, while formerly beaten-down small cap stocks have rallied nearly 10% over the same time frame.
This past Wednesday, the S&P 500 fell more than 2.5% and the NASDAQ more than 3.5% in what was their worst day since late 2022.
So why has volatility returned? Well, for one, and this is something I’ve talked about many times on this program – the stock market had become so complacent that many investors thought their darling Magnificent 7 mega cap stocks could do nothing but go straight up – and that’s usually the time the market likes to throw investors a curve ball.
There have been some fundamental reasons for the shift as well. Economic data have been showing signs of a modest slowdown of late. Then there was the Alphabet (formerly known as Google) earnings report, which showed signs of some weakness in ad spending and a lackluster forecast for the balance of the year.
Add it all up, and you have a recipe for a modest market correction – we’ll have to keep an eye on things to see if it might develop into something more serious going forward.
Featured Insight: Avoid the Crowd
I’ve talked about the dangers of investing with the crowd before, but it bears repeating, especially since it’s currently playing out in real time.
The crowded trades become the most dangerous ones when the story changes. That may be currently happening right now with all the large tech companies that investors have been feasting on for some time now. It’s not that they’re not great companies, they just became too expensive because too many investors completely ignored the price they were paying for these stocks.
The reverse of this advice can also be true – that is, look for investment opportunities that the crowd is ignoring. Things that are being ignored by other investors tend to be cheap.
No one has cared much for small cap stocks for the past few years, and all of a sudden they’ve become the best place to be invested. What are other areas investors have ignored – well, the other 493 stocks in the S&P 500 that aren’t part of the so-called Magnificent 7, international stocks, and commodities are just a few.
Looking Ahead: August a Tricky Month for Stocks
Believe it or not, August was actually the best month (on average of course) for the stock market – until 1986.
Since 1986, it has been the WORST month (again, on average) for stocks, averaging a loss of 0.8%. Last year, August of 2023, the S&P 500 fell 1.6%.
So how did August go from first to worst? Who knows? Perhaps it’s simply that the market can never become too predictable, and once investors realized that the market does well in August (before 1986 that is), the market changed based on investors desire to capitalize on that knowledge.
It’s actually possible that the market is selling off now in anticipation of the fact that August has become a very dangerous month to own stocks. Maybe the market will confuse investors yet again by rallying next month.
Copyright 2024 The Business Journal, Youngstown, Ohio.
