A summer market correction is well underway after a strong first half of 2024 for the stock market.  Over time the S&P 500 on average increases about 70% of the time with the remaining periods with down cycles referenced as three steps forward and one step back.  A consistent factor with investors and the stock market is the down cycles that are necessary to set up the next positive trend. 

This year is a classic example of this pattern.  The two major indices S&P 500 and NASDAQ started the year off strong rallying 10.16% and 9.52% respectively in the first quarter.    

Then came the one step back in April as the indices gave up about 50% to 70% of the first quarter gain.  These step-backs offer new entry points for investors who may have missed the first-quarter rally or are ready to add to their position.  Either way, the increased buying established new momentum for the stock market by the end of April that rallied the indices to new all-time highs.  This rally continued into the early third quarter and peaked around July 10, 2024, with YTD gains of 18.81% and 24.22% respectively.

Since July 10, the indices have weakened with a summer selloff.  The S&P 500 has since declined by 4.83% or 22% of its gain from its peak.  NASDAQ has dropped 9.99% or 41% of its gain since its peak.

It is worth noting that when and why investors start to sell and re-enter the market can be triggered by just about any economic or political data.  Through most of last year and into 2024, investors and analysts have been fretting about when the Fed will begin lowering interest rates. Spoiler alert – probably not until 2025.  The Feds have been clear they will lower rates when the inflation index CPI (Consumer Price Index) hits a 2% annualized rate or the US enters a recession.  So far neither event is remotely close to happening.  Nonetheless, this one topic on interest rates has triggered several short-term selloffs.  Other concerns have included possible recession, Ukraine, consumer confidence, and the Presidential election.  This recent pullback coincides with the most consistent trigger event and that is the summer vacation (yes investors take vacations too). 

Another observation is the stronger the positive trend sometimes an equal opposite pullback occurs.  No better example is market favorite Nvidia (NVDA).  As many know, NVDA has a corner in the AI industry with patent technology with its GPU (graphic processing units) chips that provide the computing of extreme levels of data that is necessary for AI software.  Not only are the largest tech companies buying their chips, but so are nations around the world as countries upgrade their computing systems (see Nvidia Rally Continues).  As a result, earnings have exponentially increased driving up the stock since January 2023 by 608% through today and making it one of the top three most valuable companies in America. 

During this remarkable rally, NVDA has had several pullbacks that interrupted its rally before resuming another new positive trend.  Since January 2, 2023, NVDA has had three notable pullbacks.  The stock declines from its previous peak were:

• August 31, 2023 to October 26, 2023: -18.0%

• March 25, 2024 to April 19, 2024: -19.8%

• June 18, 2024 thru July 30, 2024: -23.6% 

NVDA stock price remains between its 50 and 200 Day Moving Average (DMA) and may settle into a new base somewhere above its 200 DMA.  NVDA reports its next quarter’s earnings on August 28 and may kick off its next positive trend if the report exceeds analysts’ expectations.  NVDA stock pullback may have also been influenced by disappointed investors with recent earning reports by other big tech companies including Google (GOOG), Apple (AAPL), and Microsoft (MSFT) who reported in late July and early August.  I read daily of analysts adding NVDA to their buy list and I have not read articles indicating the demand for their chips changing.  Therefore, our view is that NVDA pullback is providing new buying opportunities that may follow with a new positive trend driving the stock to new all-time highs. 

What Does This Mean to Me?

As much as investors would like to have their investments increase every day without exception, that simply is not the historical experience with any asset class including real estate.  The pullbacks in value create new buying opportunities and during good economic conditions result in new positive trends increasing values to new highs. 

The key component to patterns of three steps forward and one step back is the economy.  During good economic times, the pullback is eventually reversed with profits being reinvested and with new deposits flowing into the market from many sources including 401k plans, savings, and new investors. 

However, it is worth noting that the opposite pattern is true during poor economic conditions.  During times when the economy is contracting and corporate profits are declining, the stock market gets into a pattern of three steps down with only one positive step up.  This downward trend can continue for quarters or years but typically not longer than 18 months on average.  Eventually, the US economy starts to turn around and stock values become very attractive for investors to start a new positive trend. 

Currently, we maintain our favorable view of the US economy and stock market.  We anticipate the recent pullback and market weakness to continue through the summer and may not establish a new uptrend until after the election. 

Let us know your thoughts on this Weekly Update.  We welcome your comments.  Also, let us know how we can assist you and your family in achieving your financial goals which include college funding and retirement planning.  We are UP for the challenge.