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It has been quite a week in the markets as the S&P 500 fell by -5.0%, the Nasdaq Composite by -6.7%, and the Dow Jones Industrial Average by -4.6%.

Let’s unpack what caused these significant declines:

Drivers of Performance

Rates Unchanged

The shift in sentiment started last week when the Federal Reserve kept interest rates unchanged, as expected.

While this decision was anticipated, the market was eager to hear more about the Fed’s rate outlook. Fed Chair Jerome Powell hinted that if inflation continues to moderate and economic growth remains stable, a rate cut could be on the table as soon as September.

This sparked some initial optimism early in the week, as lower interest rates make borrowing cheaper, which can stimulate economic activity and benefit the stock market.

Recession Fears

However, sentiment quickly soured starting Thursday when July’s Manufacturing Purchasing Managers’ Index (PMI) came in at 46.8%, down from 48.5% in June.

A PMI reading below 50% indicates a contraction in the manufacturing sector, suggesting that manufacturing activity is shrinking. This is concerning because a contracting manufacturing sector can signal a slowing economy.

The negative sentiment was compounded by weak labor data released on Friday. The US economy added only 114,000 jobs in July, significantly below the expected 175,000. Additionally, the unemployment rate rose from 4.1% to 4.3%.

This slowdown in job growth, combined with a decline in manufacturing activity, has investors worried that the US may be heading into a recession, a period of economic decline that can lead to reduced consumer and business spending.

Japan Increases Rates

The week’s crescendo occurred when Japan’s Nikkei Index plunged by approximately -13.4% yesterday, the most significant single-day drop since Black Monday in 1987.

This market move was triggered by the Bank of Japan’s decision to raise interest rates for only the second time since 2007, moving to 0.25%. After maintaining near-zero or negative rates for a long period, this shift spooked markets, exacerbated by concerns over the unwinding of the Yen Carry Trade.

A “Carry Trade” involves borrowing in low-interest currencies like the Yen to invest in higher-yielding assets, such as US stocks. As Japanese rates rise, the Yen rises and the attractiveness of this trade diminishes, causing investors to liquidate their US positions to cover Yen loans.

Manic Mr. Market

This past week serves as a reminder of how fickle the market can be.

Just a few weeks ago, everyone was optimistic, with indices reaching new highs. As expectations for interest rate cuts grew, investors shifted away from tech and semiconductor stocks into more interest rate-sensitive stocks such as utilities and real estate.

Now, panic is setting in as recession concerns rise and the realization that central bank actions around the globe can impact the US market. Sentiment is that the Fed has waited too long and needs to act fast to rectify the situation, or more pain will soon follow.

Closing Thoughts

These periods of market volatility are a great reminder of the importance of having an investment strategy and sticking to it regardless of market movements.

Understanding what you own, why you own it, and having a good grasp of the true value of your investments allows you to stay calm during market downturns. This knowledge helps prevent panic selling and enables you to make informed decisions while others may react out of fear.

Earnings Season

We are in the middle of earnings season. Below is a helpful resource to help you keep track of when companies report.

• Earnings Calendar

Don’t Focus On The Share Price

Investing in stocks makes it easy to get fixated on daily price changes. As the market noise around you grows you naturally start to wonder “Is now the time to buy now?” or “Is it time to sell?”

However, focusing only on the share price can be misleading.

Understanding that the share price is just a number and doesn’t tell the whole story is crucial. Instead, you should focus on the actual VALUE of the business behind the stock.

Share Price vs Company Value

Consider buying a house. You wouldn’t just look at the asking price but also consider the location, condition, and other aspects. Along with the asking price, these considerations give the house its value, and you can quickly tell when a property is under or overvalued.

The same goes for investing. The share price is merely what someone is willing to pay for a small piece of the company at a given moment, more important is what the underlying business is.

Focus on the Business, Not the Price

The true value of a company lies in its fundamentals.

For example, if you had invested in Apple before the 2008 market crash, you might have been tempted to sell because the market was in a tailspin. However, Apple’s robust business model, demand for its revolutionary products, and solid financial health were more important than short-term price drops.

Despite the market downturn, those who held onto their shares have seen substantial gains.

Similarly, during the DotCom Bubble in 2000, Amazon’s stock price fell by 90%. Yet, Amazon’s long-term potential wasn’t reflected in the share price at that time. People who focused on Amazon’s business model and future prospects saw significant returns as the company’s value became apparent over time.

When to Buy

If you’re considering investing in a company, think about it as if you were buying a house.

Create a checklist of what you want in a company:

• What is its business model?

• How does the company make money?

• Who are its competitors?

• How difficult is it for competitors to replicate what the company does?

Only invest in a company that matches your checklist. Once you’ve found a company that fits, THEN look at the share price to decide if it’s a good buy based on your valuation.

Let’s say you’ve researched a company and determined that its shares are worth $13 each based on your checklist. If the current share price is $12 or even $10 it is a decent time to buy.

What if the share price drops?

Well, if you believe it is worth $13 per share and due to pure market negatively, the share price drops from $12 to $8 per share, then isn’t it an even better opportunity to buy?

In other words - buy when it makes sense to you based on what you believe a company is worth.

When to Sell

There are several reasons to consider selling shares:

1. Finding a Better Investment: If a new opportunity looks more promising, you might want to sell your current shares to invest elsewhere.

2. Deterioration in Quality: If a company’s financial health or business model weakens, it may be time to sell.

3. Attractive Offers: If you get an offer that exceeds your valuation of the company, selling could be a smart move.

However, avoid selling just because of market noise or economic concerns like a possible recession or inflation fears.

Focus on the company’s performance and fundamentals rather than external factors.

In Summary

While share price is a consideration, it’s only one part of the investment puzzle.

By concentrating on a company’s value, financial health, and business fundamentals, you’ll be in a better position to make informed investment decisions when those around you are panicking

Investing is about finding valuable assets at good prices and maintaining a long-term perspective, rather than reacting to daily price movements.

This newsletter is here to help you become a better investor. If you have any topics you want to dive into or burning questions about investing, I want to hear from you!

What topics or questions are on your mind?

Simply reply to this email with your thoughts or questions, and let’s make our next newsletter even better together.

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