The stock market’s monthslong rally stumbled this month. The thrill of seeing investment gains, with metronomic regularity, is gone.
I miss that feeling: scanning my investments and knowing in advance that the numbers will be larger than they were the last time I looked. But, in an important way, the market’s summer setbacks have been long awaited, and they come as something of a relief.
Don’t misunderstand. It’s not that I want to see the rising stock market stop in its tracks. I’d prefer an endless move upward, making me, and everyone else, richer.
But that’s a fantasy. In the real world, upward stock market thrusts are always temporary. When stocks rise too quickly, they inevitably fall and sometimes crash. The stock market is essentially volatile, and for every big winner, dozens of casualties occur.
That’s why, as a second-best alternative, I hope for something more modest: a choppy market that experiences periodic downturns, but one that trends upward for very long periods.
The Stock Market’s Movements
That is, in fact, a rough description of what the stock market has been like for the past 25 years, according to statistics provided by Howard Silverblatt, senior index analyst for S&P Dow Jones Indices. In that period, the S&P 500 has returned 552.31 percent, or 7.8 percent, annualized, but to garner those handsome returns, an investor would have had to sit tight through countless downturns.
While August has so far been a negative month for the stock market, there have been no major downturns this year. Through July, the S&P 500 rose for five consecutive months. Just seven big tech stocks — Apple, Nvidia, Microsoft, Amazon, Meta (Facebook), Tesla and Alphabet (Google) — accounted for more than two-thirds of the S&P 500’s gains.
This year, through July, the S&P 500 rose 15.9 percent, for a total return, including dividends, of 16.9 percent. Those were splendid numbers, but the market had been rising so rapidly on such a narrow base that it seemed to me that it was setting itself up for a fall.
What’s more, from a market bottom on Oct. 11, 2022, through July, the S&P 500 gained 27.9 percent, for a total return of 29.6 percent including dividends. In June, when the market had gained 20 percent from its October low, many commentators declared that the bear market that started on Jan. 3, 2022, was over, and that a new bull market had begun.
Mr. Silverblatt did not agree, because the market had not returned to its peak of Jan. 3, 2022, when the S&P 500 stood at 4,796.56, more than 9 percent above its level on Thursday. By his definition, it won’t be clear that the S&P 500 is in a bull market until it climbs back to that level. Categorizing the market this way, as either bull or bear, is a straightforward retrospective judgment, not an assertion of the market’s future direction, which no one can forecast accurately.
This cautious way of thinking about the market is one I favor.
I’m not sure what the rally that started in October will amount to, but based on history, the summer swoon could be a good thing.
The stock market’s problems in August stem, at least partly, from shifts in the fixed-income markets: a sharp rise in short-term interest rates underway since the start of 2022, and a surge in long-term rates since June.
The Lure of Fixed Income
Thanks to the rise in short-term rates, it’s possible to get a great return on cash. Money market funds provide yields well above 5 percent.
Bond yields have risen this summer, and they are now high enough to make bonds, with their safer profiles, an attractive alternative to stocks. And many factors driving up yields are negative for stocks, too.
Briefly put, short-term rates — those embodied in money-market funds as well as credit cards — are a direct consequence of the Federal Reserve’s campaign to reduce inflation. The Fed has been tightening monetary policy, mainly by raising the short-term rates it controls, the best known being the federal funds rate.
In Jackson Hole, Wyo., on Friday, Jerome H. Powell, the Fed chairman, is expected to indicate that until there is conclusive evidence that inflation has been tamed, the Fed will maintain these rate levels or take them higher.
Longer-term interest rates — those for bonds and mortgages — have been rising, too. But these rates are complicated. They are set in the vast bond market.
By bidding down bond prices and raising yields (prices and yields move in opposite directions, as a matter of basic bond-market math), traders have indicated that they consider the economy to be stronger and inflation to be more persistent than had been expected a few months ago. The downgrade of U.S. Treasury debt by the Fitch Ratings agency also contributed to the run-up in rates on Treasury securities. And because Treasuries serve as benchmarks for virtually every other bond and, indeed, for every other investment in the global economy, higher rates have made stocks less appealing in comparison.
In addition, the balance of supply and demand in the bond market has been tilting in a way that is contributing to higher rates. The Treasury has been auctioning an unusually large amount of debt, bulking up its resources after the brinkmanship of the debt ceiling crisis this spring. That increase in the supply of Treasuries coincides with a reduction in demand from several important sources: The Federal Reserve is no longer purchasing bonds, while the appetite for Treasuries from Japan and China has begun to flag, too.
All these factors have contributed to the run-up in yields, and they are weighing on stocks.
Reading the Economy
Furthermore, one core issue assessed by bond buyers — the prospects for economic growth or recession in the United States and elsewhere around the world — has obsessed stock traders, too. But, at the moment, the U.S. economy is extraordinarily difficult to decipher.
Higher interest rates might have been expected to slow down the economy by now, or throw it into recession. A waning of economic growth in China might also be expected to be a drag on the U.S. economy.
But the U.S. economy and the job market, in particular, have been remarkably resilient, and consumer spending remains strong. As a consequence, corporate earnings in many sectors have exceeded Wall Street’s muted expectations. If a recession were to develop, however, the outlook would be much worse.
All that said, there are many reasons for optimism. In July, the market rally broadened substantially, with the stocks of smaller companies outperforming the giants, and every domestic sector posting gains. It was just what a stock investor would want to see in a market with sustainable upward momentum.
Even the surge in interest rates could turn out to be innocuous. After all, it has returned rates to a level deemed healthy in previous economic cycles. Since January 1962, 10-year Treasury yields have averaged 4.2 percent — not far from where they are now. The appropriate level for interest rates for the rest of this decade is being debated at the Fed and among a broad range of economists.
In short, uncertainty about inflation and the Fed’s response to it are well-founded. The paths of the markets and the economy may meander inconclusively for a while, thwarting anyone who wants to place a decisive bet one way or another.
But it’s a complicated world. Binary distinctions like bull market and bear market reduce complexity to simple notions that investors can grab onto. But I think these, in particular, are the wrong notions.
The bull and bear market labels imply future action.
In a bull market, stocks, for the most part, rise. In a bear market, more often than not, they fall. You might assume that you should avoid bear markets and welcome bull markets. But that’s not a wise course for long-term investors, who are better off buying when prices are low and selling only at moments of their own choosing.
I’m bullish about the stock market for the long haul. But that’s very different from believing that we are in a bull market or a bear right now. I just don’t know and don’t really care.
Instead, I’m investing for the long run, without trying to time market movements or pick individual stocks or bonds. I hold a piece of the world’s entire stock and bond markets — not just the S&P 500 — through low-cost, broadly diversified index funds, and have been hanging in for decades.
Market rallies are fun, and it’s a letdown when they take a breather. But an August pause could be just the thing the stock market needs. I worry about lots of things, but not that. Enjoy the rest of the summer.
Jeff Sommer writes Strategies, a column on markets, finance and the economy. He also edits business news. Previously, he was a national editor. At Newsday, he was the foreign editor and a correspondent in Asia and Eastern Europe. More about Jeff Sommer
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