By John Lau
September 1, 2023 – The S&P 500 managed a solid gain last week, but volatility continued to rise. One reason why markets have suddenly become volatile is, for the first time in months, economic data and earnings commentary implied there are some risks to the “Three Pillars of the Rally” (Soft/No Landing, Disinflation, and Fed Done/Almost Done). Specifically, the August flash composite PMIs were the first significant data point to hint that the economy is suddenly losing momentum, while high Treasury yields and Powell’s speech from Jackson Hole, Wyoming interpreted by markets as being hawkish (even though it really wasn’t on a fact basis) put some doubt into the idea that the Fed was done or almost done with rate hikes.
Considering that the S&P 500 had aggressively priced in essentially no damage to the “Three Pillars of the Rally,” this news has resulted in an increase in volatility, and the S&P 500 has traded back into the “Fair Value” range. If we get more negative news, namely disappointing growth data that raises hard landing worries, a bounce back in inflation in the upcoming CPI report (September 13), or Powell hinting that rates will rise further, then we should expect further declines in stocks as the “Three Pillars” are further eroded. However, that is not happening right now. On the margin, the “bad” news hasn’t really been that bad, as growth is still solid, inflation is still declining and the Fed is still likely done, or close to done, with rate hikes.
Here’s the point: So far, the declines in stocks and the uptick in volatility are more a function of previously unrealistically optimistic expectations and not some sudden, materially negative shift in fundamentals, as that simply hasn’t happened yet. Going forward, as has been the case for all of 2023, the data will remain the key. If, in the next few weeks, the CPI does not fall as much as expected, or if the ISM manufacturing and service indices fall towards contraction territory, then the disinflation narrative would probably be challenged—and we will be watching closely for those risks. For now, while there has been some erosion of the Three Pillars, they are still standing and this pullback/uptick in volatility is more a function of investors more appropriately pricing the current environment, not some sudden reversal of the factors that have underwritten the rally (although again we will continue to closely monitor those risks, because if that does happen, it will require getting more defensive, and quickly).
Disclosures
Investment advisory services offered through Robertson Stephens Wealth Management, LLC (“Robertson Stephens”), an SEC-registered investment advisor. Registration does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. This material is for general informational purposes only and should not be construed as investment, tax or legal advice. Please consult with your Advisor prior to making any investment decisions. The information contained herein was compiled from sources believed to be reliable, but Robertson Stephens does not guarantee its accuracy or completeness. Investing entails risks, including possible loss of principal. Past performance does not guarantee future results. This material is an investment advisory publication intended for investment advisory clients and prospective clients only. Robertson Stephens only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Robertson Stephens’ current written disclosure brochure filed with the SEC which discusses, among other things, Robertson Stephens’ business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov. © 2023 Robertson Stephens Wealth Management, LLC. All rights reserved. Robertson Stephens is a registered trademark of Robertson Stephens Wealth Management, LLC in the United States and elsewhere.
Securities offered through Fortune Financial Services, Inc. Member FINRA/SIPC. Robertson Stephens Wealth Management, LLC and Fortune Financial Services, Inc. are separate entities and are not affiliated.
Why Have Markets Suddenly Become Volatile?
By John Lau
September 1, 2023 – The S&P 500 managed a solid gain last week, but volatility continued to rise. One reason why markets have suddenly become volatile is, for the first time in months, economic data and earnings commentary implied there are some risks to the “Three Pillars of the Rally” (Soft/No Landing, Disinflation, and Fed Done/Almost Done). Specifically, the August flash composite PMIs were the first significant data point to hint that the economy is suddenly losing momentum, while high Treasury yields and Powell’s speech from Jackson Hole, Wyoming interpreted by markets as being hawkish (even though it really wasn’t on a fact basis) put some doubt into the idea that the Fed was done or almost done with rate hikes.
Considering that the S&P 500 had aggressively priced in essentially no damage to the “Three Pillars of the Rally,” this news has resulted in an increase in volatility, and the S&P 500 has traded back into the “Fair Value” range. If we get more negative news, namely disappointing growth data that raises hard landing worries, a bounce back in inflation in the upcoming CPI report (September 13), or Powell hinting that rates will rise further, then we should expect further declines in stocks as the “Three Pillars” are further eroded. However, that is not happening right now. On the margin, the “bad” news hasn’t really been that bad, as growth is still solid, inflation is still declining and the Fed is still likely done, or close to done, with rate hikes.
Here’s the point: So far, the declines in stocks and the uptick in volatility are more a function of previously unrealistically optimistic expectations and not some sudden, materially negative shift in fundamentals, as that simply hasn’t happened yet. Going forward, as has been the case for all of 2023, the data will remain the key. If, in the next few weeks, the CPI does not fall as much as expected, or if the ISM manufacturing and service indices fall towards contraction territory, then the disinflation narrative would probably be challenged—and we will be watching closely for those risks. For now, while there has been some erosion of the Three Pillars, they are still standing and this pullback/uptick in volatility is more a function of investors more appropriately pricing the current environment, not some sudden reversal of the factors that have underwritten the rally (although again we will continue to closely monitor those risks, because if that does happen, it will require getting more defensive, and quickly).
Disclosures
Investment advisory services offered through Robertson Stephens Wealth Management, LLC (“Robertson Stephens”), an SEC-registered investment advisor. Registration does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. This material is for general informational purposes only and should not be construed as investment, tax or legal advice. Please consult with your Advisor prior to making any investment decisions. The information contained herein was compiled from sources believed to be reliable, but Robertson Stephens does not guarantee its accuracy or completeness. Investing entails risks, including possible loss of principal. Past performance does not guarantee future results. This material is an investment advisory publication intended for investment advisory clients and prospective clients only. Robertson Stephens only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Robertson Stephens’ current written disclosure brochure filed with the SEC which discusses, among other things, Robertson Stephens’ business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov. © 2023 Robertson Stephens Wealth Management, LLC. All rights reserved. Robertson Stephens is a registered trademark of Robertson Stephens Wealth Management, LLC in the United States and elsewhere.
Securities offered through Fortune Financial Services, Inc. Member FINRA/SIPC. Robertson Stephens Wealth Management, LLC and Fortune Financial Services, Inc. are separate entities and are not affiliated.
Talk To Us