Sell in May and come back in September: a tried-and-tested maxim?
On Monday 5 August, panic reigned on the markets. At the close, the Nasdaq, the barometer of the technology sector, recorded a fall of nearly 4% (driven in particular by a 6.7% drop in Nvidia, the famous microprocessor company that had briefly overtaken Microsoft in terms of market capitalisation). The S&P 500 fell 3% and the Dow Jones 2.6%. Compared with their July peak, these indices fell by 7%, 8.5% and 6% respectively.
The rest of the world was not spared. One need only note the historic 12.4% fall in the Nikkei index (Tokyo) or the 2.1% drop in the CAC 40 (Paris).
The reasons behind this market crash
Disappointing numbers: the shadow of an imminent recession
At the root of this debacle was a growing fear of a recession in the United States, fuelled first by a contracting manufacturing purchasing managers' index. Indeed, the ISM PMI, which assesses the economic conditions of manufacturing companies through a survey of 400 purchasing managers, came in at 46.8, down from 48.8 in July. Below 50, this index signals a contraction. Then the July unemployment numbers published in a jobs report disappointed, reaching 4.3% against the 4.1% anticipated.
The sweat of the land of the rising sun
The tumble of the Tokyo Stock Exchange also had its part to play. It probably resulted from the surprising rise in key interest rates by the Bank of Japan (BoJ), causing the yen to climb back to its highest level since January after months of free fall. This recovery of the yen penalised Japanese export-oriented stocks, explaining the fall in the Nikkei index. Moreover, this rise hurt the followers of the "carry trade", a strategy consisting of borrowing in a low-interest-rate currency (such as the yen) to invest in a high-interest-rate currency. Indeed, with the increase in key interest rates, this strategy became less attractive, as borrowing in yen was now more costly.
The butterfly effect of Warren Buffett
Among the other catalysts of this stock market crash was the decision of Berkshire Hathaway, Warren Buffett's holding company, to part with nearly half of its Apple shares. The decision of the "sage of Omaha", perceived as a shrewd investor, shook the markets, prompting other investors to follow his example. At the same time, the escalation of violence in the Middle East added an extra dose of volatility to the markets.
Faced with these events, some newspapers did not hesitate to adopt an apocalyptic tone with headlines such as "black Monday", "Wall Street gives in to panic", or "chaos on the markets". Reading them, one might believe that the end of the financial world was near, all the more so as on Monday the volatility index (VIX), nicknamed "the fear index", jumped like a rabbit, reflecting investors' fears. But should we really dread an unprecedented crisis?
The light at the end of the tunnel
Fortunately, since that "black Monday", the markets have caught their breath. Our dear Aunt Agathe, always ready to analyse stock market fluctuations, took a step back to examine the weekly performance of our favourite indices. In the end, over the week, the S&P 500 fell by only 0.045%, a trifle, while the Dow Jones fell by 0.6% and the Nasdaq by 0.18%. Even Apple, after its difficult break-up with Warren Buffett, is now down only 1.6% (against 5% on Monday). Admittedly, the Nikkei index is still showing a 2.5% fall, but it has come a long way back.
Aunt Agathe's lessons
What lessons can we draw from this story? Aunt Agathe reminds us that stock market crashes are an integral part of market cycles. Financial history is no stranger to a crash, and fortunately they have not all had the same impact as those of 1929 or 2008. Like an exhausted sprinter, the market sometimes needs to catch its breath in order to set off again stronger than ever.
Admittedly, in the short term, a decision (such as the Bank of Japan's to raise its key interest rates) can cause strong volatility on the markets, which may give rise to impressive falls. However, in the long term, it is companies' results that influence the stock market.
We have already pointed this out in a previous article: it is almost impossible to predict the evolution of the markets or to beat them, so much do they tend towards the efficient market hypothesis (in its semi-strong form). This is why Aunt Agathe reminds us of it once again: the important thing is not to play the sorcerer's apprentice by trying to predict short-term fluctuations, but rather to guard against the risks of volatility by diversifying one's investments, both in terms of assets and of timing.
Would you like to navigate the choppy waters of the financial markets more serenely? To learn to better grasp a stock market crash? Do not hesitate to visit our website to discover our training programme in portfolio management!
#FinancialTraining #PortfolioManagement #PersonalFinance #Diversification
1) Google Finance (2024). NASDAQ: NDAQ, NASDAQ: AAPL, INDEXDJX: .DJI, INDEXSP: .INX, .
Accessed on 10 August 2024 at:
https://www.google.com/finance/quote/NDAQ:NASDAQ?sa=X&ved=2ahUKEwiZmJHd3u6HAxXl2QIHHYcRGvgQ3ecFegQIPRAh&window=1M
2) Investing.com. (2024). United States - ISM Manufacturing PMI.
Accessed on 10 August 2024 at:
https://fr.investing.com/economic-calendar/ism-manufacturing-pmi-173
3) U.S. Bureau of Labor Statistics. (2024). Employment Situation Summary.
Accessed on 10 August 2024 at:
https://www.bls.gov/news.release/empsit.nr0.htm
