No one should be surprised by a market pullback even if it comes as a shock when most of it happens in one day. The U.S. market has been on a tear, rising eight of the past nine months. The primary headlines for Monday’s cascading losses were the Bank of Japan’s rate hike and a weaker-than-expected U.S. employment report. Several additional factors exacerbated the selling pressure:

• Overly bullish sentiment and elevated valuations. Investor sentiment had become frothy, particularly in the tech sector, and stocks had simply gotten a bit ahead of themselves.
• Increased scrutiny around the payoffs for artificial intelligence (AI) investments. This scrutiny followed some evidence of slowing consumer demand during second quarter earnings season.
• Leverage in the financial system. Borrowing in the yen (the so-called carry trade) is unwinding as global markets fall and the yen surges — plus some institutional traders appear to have been caught offsides in the downdraft, driving more forced selling.

Tuesday’s strong rebound showed once again that Panic is Not a Strategy.  Pullbacks and even corrections — as painful as they are — are a normal part of investing. Think of them as tolls to pay on the road to attractive long-term returns. The S&P 500 and its predecessor indexes have gained over 11% annualized since 1950, through every financial condition, recessions, crises, and pandemics since then.  And that’s while averaging a pullback of over 10% per year – even in up years.

Keys to investing success are to be properly diversified, maintain a long-term perspective, don’t chase “media darling” investments and don’t over leverage your portfolio.

As always, feel free to contact us if you have any questions,

Best regards,

Andrew T. Gardener, CFP®
President & Founder
Tanglewood Legacy Advisors