Cracks are possibly beginning to appear in the stock markets’ armor. The large cap Standard & Poor’s 500 has very rarely traded below its 50 day moving average during the past 11 months. Anytime it has, it has promptly rallied right back above this upward trending average. It has been an incredible rally with very limited volatility.
Until today. Today the S&P 500 had its largest price drop in percentage terms since May 12th, down 1.7%. It could have been worse as it was down at one point during the trading session almost 2.9%. Today’s closing price is the most it’s been below its 50 day moving average since November 2nd, 2020. Only time will tell if this is just another short-term blip on the radar screen, or the start of a more extended period of volatility.
The possible culprits for today’s volatility are numerous. These include the likely imminent debt default of a large property developer in China (Evergrande); the fast approaching deadline to raise our country’s debt limit; the Federal Reserve’s policy meeting this week in which they may decide to scale back stimulus measures; and the possibility of an increase in corporate tax rates which would have a negative impact on earnings. These concerns today prompted a “risk-off” mindset among many investors.
As always, the eventual magnitude and duration of any weakness in stocks is completely unknown. When stocks are going straight up as they largely have over the past 18 months, it is easy to regret not being invested aggressively. However, when the inevitable volatility finally arrives, it is comforting to know you are appropriately invested in advance for periods of volatility.
Glenn S. Rank, CIMA®
Certified Investment Management Analyst®
President