Metis AM
August was a volatile month for stock markets around the world. After a difficult start with many major indices losing value in the first few days of the month, most markets had recouped losses within weeks.
While volatility can be nerve-wracking, the events of this summer can serve as a helpful reminder of the nature of the stock market. By understanding what happened, you could find future periods of volatility less daunting.
Read on to discover what caused markets to drop in early August and what their recovery can teach you about responding to volatility when managing your investments in the future.
The Bank of Japan raised interest rates, strengthening the yen against the dollar
At the end of July, Reuters reported on the Bank of Japan (BOJ) announcement that it was raising interest rates for the second time this year, bringing them to 0.25%. This is the highest level since 2008, and the BOJ did not rule out further increases later in the year.
In the days that followed the hike, CNBC reported that the yen strengthened sharply against the dollar. This created volatility on Japanese stock markets and the Nikkei 225 index fell by 12%, recording its worst trading day since 1987.
Following the market turmoil and appreciation of the yen, the BOJ announced it would adopt a more cautious approach to raising interest rates for the rest of the year.
Weak economic data in the US created further volatility after the Federal Reserve held rates steady at the end of July
At the same time as the BOJ was raising interest rates, the Federal Reserve in the US chose to hold rates steady, despite market expectations of a cut. Though markets seemed to take this in their stride, just days later disappointing economic data created fears that the US could be heading for a recession.
US Bank reports that a jobs market report published on 2 August showed that fewer jobs had been added in July than anticipated, and the unemployment rate rose.
In subsequent trading days, major US indices experienced sharp falls. The US Bank report shows that, by the end of trading on 5 August, the Nasdaq Composite was down 13% from its recent peak on 10 July, and the S&P 500 was down 8.5% from its recent peak on 16 July.
The volatility was short-lived and most major indices recovered their losses within days
Fortunately, the volatility that markets experienced in the first few days of August was short-lived. Within days of experiencing its worst trading day in two years, the Guardian reports that Wall Street had its best trading day in two years.
The report shares that, on 8 August, the S&P 500 rose 2.3%, the Nasdaq Composite rose 2.9%, and the Dow Jones rose 1.8%. Indeed, J P Morgan data reveals that the S&P 500 returned 2.3% for the month. The recovery is attributed to new US jobs figures, showing that jobless claims had fallen to 233,000, down from 250,000 the week before.
Morningstar reports that market conditions in Japan also stabilised within days of the Nikkei’s dramatic fall. Moreover, the majority of Japanese funds that are available to UK investors remained in positive territory for the year as of 12 August.
The market recovery in August contains some helpful lessons about how to respond to volatility
When markets fell at the start of August, you may have felt nervous about the prospect of further losses. Indeed, the volatility was in part caused by concerned investors selling their investments.
But if you had given in to the emotions of fear and panic and moved your money out of the stock market, you would have likely missed the recovery that occurred just days later. Investors who remained calm and stayed the course with their investments may have benefited from this recovery.
This isn’t unique to the market conditions in August. The graph below shows how long it would have taken you to recoup your losses if you’d moved your money to cash during historic market falls of 25% instead of staying invested.
Source: Schroders
As you can see, investors who moved their money to cash took much longer to recoup their losses. If you’d done this during the 2008 financial crisis, you would still be waiting for your savings to recover in 2024.
Though past performance does not guarantee future performance, this serves as a helpful example of why it can be dangerous to your wealth to attempt to time the market.
Moreover, J P Morgan data demonstrates that most major indices remain in positive territory for the year to date. This shows that short-term fluctuations on the stock market may not have a long-term effect on the growth of your portfolio.
If you’re ever in any doubt about whether market changes might affect you and how to respond, the most sensible thing to do is consult your planner. They can review your investments and advise on whether any changes are needed.
Usually, your portfolio will be balanced to factor in occasional volatility, as this is part and parcel of investing on the stock market. So, unless your personal circumstances or goals have changed, short-term worry is not usually a reason to make changes to your investments.
Read more: 3 great reasons time in the market usually beats timing the market
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Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
