It started on just the second day of the month. American credit rating agency Fitch Ratings downgraded U.S. debt to AA+ from the highest AAA. In the process, it delivered a dressing down to the U.S. political system and the country’s fiscal policy, citing “a steady deterioration in standards of governance.”
Predictably, markets slumped, with the Nasdaq falling more than 2%, logging its worst day since February.
Then China came into sharper focus, with data showing slowing growth, soaring youth unemployment, and the economy slipping into deflation. The White House restricted U.S. investments in the country, which raised concerns of aggressive retaliation. President Biden called China a "ticking time bomb" that puts the rest of the world at risk. As if to put an exclamation point on all of it, the world's most indebted property developer, China Evergrande, filed for Chapter 15 bankruptcy protection.
The result? The first 18 days of August saw the S&P 500 drop over 5% with the Nasdaq down two points beyond that.
Shaking It Off
Green shoots began to emerge going into the home stretch. Nvidia (NVDA) blew out earnings for a second quarter in a row, putting to rest any skepticism that AI is the future. And Fed Chair Powell’s remarks at the annual Jackson Hole Economic Symposium contained no surprises. As I write, the market is largely in recovery mode from an ugly first half of the month.
What Will September Bring?
September has a reputation as a tough month. So right off the bat, seasonality will be giving investors the spook. Beyond sentiment, we’ll see a trio of market-moving events: an upcoming U.S. jobs report, CPI inflation data, and another of the Fed’s big rate decision. How will all this shake out? As expected, opinions vary. Party poopers first.
Strategists at J.P. Morgan have concluded that U.S. consumers have spent all their excess savings from the pandemic, which means they have less money to invest. As a result, they expect stocks to decline further. Looking ahead, the bank's Chief Global Market Strategist Marko Kolanovic sees the S&P 500 finishing the year at 4,200, or about 4.4% lower than current levels.
- Stifel's Chief Equity Strategist Barry Bannister likewise believes this year's strong stock rally is over, and investors should prepare for weak returns for September and the rest of the year. He expects the S&P 500 to finish the year near current levels.
- David Rosenberg of Rosenberg Research is fearful of a repeat of last year's stock slump due to higher-for-longer borrowing costs and China contagion.
- Strategists at Goldman Sachs see no reason to fret the August slump. They note the odds of a recession declining, predict that buybacks will soar now that the second-quarter earnings season is over, and reiterate their year-end price target of 4,700 for the S&P 500, or about 8% higher than current levels.
- Fundstrat's Tom Lee has predicted that the S&P 500 will notch a record high this year at 4,825. “We don't think the market outlook has changed into year-end 2023. In fact, this (the August slump) will ultimately prove to be a great buying opportunity.”
- Wedbush Securities believes a solid earnings season and tailwinds from artificial intelligence should push tech stocks higher despite the recent near-term pullback. Says analyst Dan Ives, "We firmly stick with our bullish call that a 12%-15%+ in tech stocks will be in the cards heading into year-end."
And For What It’s Worth…
Looking for the next meme stock? [Please say no.]
Vietnamese electric vehicle maker VinFast is the latest entry into the crowded EV auto marketplace. Its August 15 listing on the Nasdaq initially valued the company at $23 billion. But the first day of trading saw the stock price soar – from $10 to $37. By the close, it was worth $87 billion, greater than the market capitalization of Ford, greater than General Motors. And it was off to the races. By the time we got to August 28, VinFast was the world’s third-most valuable automaker behind Tesla and Toyota.
Of note, the company is not profitable. And while they’ve shipped over 3,000 autos to the U.S. since late last year, only 137 of them have actually been sold as of June. MotorTrend says: “The VinFast VF8 is nowhere near ready for public consumption.” Jalopnik says: “…dog-slow with crap ride quality.”
Enter short-seller Jim Chanos, who made a fortune betting against Enron, calling the carmaker a $200 billion ‘meme stock.’ The price collapsed hours later, plunging over 40% in a single session and shedding $90 billion in market value.
Move over GameStop. There’s a new casino in town.
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection* remains paramount.
* WHAT DOES PROTECTION LOOK LIKE?
At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can mean an overweight position in a model built for protection. Lower volatility and lighter drawdowns often indicate that a model is more protective in nature. Bond Bulls, for example, has the lowest volatility and max drawdown of any of the models.
Check out the updated white paper Conservative vs. Aggressive Portfolios for a list of all the strategies ranked from lowest risk to highest in terms of max drawdown.
Protection can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution. Or even a bit of the Zen Knuckle combined with a couple of the above.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Further down the page in Conservative vs. Aggressive Portfolios you can see examples of various combinations and how they have performed over the years.
Protection can mean keeping an eye on provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary).
See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
Finally, employing stop-loss and stop-limit orders. A stop-loss order is an order placed with a broker to buy or sell a specific stock (or ETF) once that asset reaches a specific price. It's designed to limit an investor's loss on a security position. While not perfect, and you'll find my own pro-and-con thoughts on the Q&A tab in the Members Pages, stop-losses have their place in risk management.
Read more on the Investopedia page for Stop-Loss Orders.