The members of the Horizon Advisor Network Investylitics Committee met on the afternoon of Monday, August 5th. In mid-July, the S&P 500 index reached a new all-time high before falling back as we neared month's end. Over the last week, the combination of the Federal Reserve Bank not lowering interest rates at its July meeting combined with a disappointing unemployment report sparked levels of market volatility that we had not seen since the 2020 COVID-19 crisis. Our committee members reviewed these recent events and the outlooks of the various economists and market strategists we follow.
As we watched markets continue to rise in recent months, our committee reminded you in our June 10th report that trees don’t grow to the sky, and some bouts of volatility and pullback were likely in the near term. “As we move towards the summer months, the political conventions, and the upcoming elections in the fall, we would not be surprised to see some additional volatility arise.” We have seen this play out over the last week, as the S&P 500 index pulled back approximately 8% while technology and small-cap stocks both moved into correction territory, dropping more than 10%.
This volatility was largely driven by the combination of the Federal Reserve Bank once again not lowering interest rates at its July meeting last week. The Fed puts out its Summary of Economic Projections on a quarterly basis. In both December and March, they indicated that they would likely cut interest rates three times this year. This initially led to an upturn in the markets, as investors expected lower interest rates to spark economic growth and higher corporate profits.
However, after raising interest rates for the 11th time in July 2023, the Fed has gone a full year and has not cut the rates yet. This stands in contrast to other major central banks, such as the European Central Bank, the Bank of England, and the Bank of Canada, which have all started lowering interest rates as global inflation pressures have continued to moderate.
After the Fed decision on Wednesday last week, the Bureau of Labor Statistics released its monthly unemployment report on Friday. The expectation was for 180,000 new jobs to be created. The actual number of new jobs came in at a disappointing 114,000, much lower than expected. At the same time, the unemployment rate, which had bottomed at 3.4% in April ‘23, unexpectedly rose to 4.3%. We are also seeing weekly unemployment claims, a leading economic indicator, continue to rise.
This combination of real interest rates remaining at a restrictive level, while employment measures continue to point towards a slowing labor market has sparked concerns of recession. This led to a significant downturn in the markets on Friday and Monday. The Volatility Index, also known as the VIX, jumped to its highest level since the 2020 COVID-19 pandemic. Recent geopolitical events in the United States, the Middle East and South America have also added to investor unease.
Against this backdrop, the committee would like to remind you of a couple of things. First, all the committee members continue to receive questions about the impact of the upcoming election on the markets and the economy. As you can see from our first chart below, provided to us by our friends at Capital Group, if you had invested $10,000 in their Investment Company of America Fund, ICA, at the beginning of any presidential administration in the last 90 years, you would have made money. Some did better than others, but this is an extremely strong illustration of why staying with your diversified investment portfolio, despite alarming headlines, generally makes good sense.
