I hope everyone is having a great summer thus far. And I say this when a lot is going on in the world right now.

We are living in interesting times and I try to stay connected with friends and family to what’s going on in their lives (if you are one of them and we haven’t connected lately – please reach out!).

I originally thought this post was going to be about the $3.5 trillion budget deal or what to do with any child tax credits that may be heading your way.

But then global markets jolted on fears of new viral variants.

Is the sky actually falling? Could a big correction happen? Sure it could.

Dating back to 1980, the S&P 500 has dropped intra-year an average of 14.3% (Source: FactSet, J.P. Morgan Asset Management.) In other words, the index hit a high point (peak) and then within the year pulled back (trough) fairly substantially. These corrections can cause a lot of anxiety.

Yet despite the drops, the index has managed to push higher more than 75% of the time (31 of 41 years). Past performance is no guarantee of future performance, but at least the numbers may help reduce your stress level.

Looking at the below chart from Schwab, this shows the most recent 20 years worth. Pullbacks (of 10% or more) occurred in 11 of the past 20 years. Read more of the research article here.

 

Now, here’s my take on what’s going on with the recent market volatility.

After hitting record highs in July, markets tumbled days later, sending the Dow 700+ points lower.

Why? Mostly fears of a COVID-19 resurgence caused by the delta variant that could derail the economic recovery.

Case numbers are rising globally, even in countries with high vaccination rates, and the surge could lead to a return to travel restrictions and business closures.

Could these market jitters cause a 10%+ correction?

Absolutely.

Should we panic and freak out?

Definitely not.

Here are a couple of reasons why:

Summer months can bring higher volatility, perhaps because of lower trading volume, making bad news shake the market harder.

We’ve had a pretty long winning streak, and corrections are part and parcel of a healthy market, especially when we’re near all-time highs. Remember – volatility is normal!

New variants and higher case counts are a threat. However, vaccination rates are continuing to rise, and experts don’t think that we’ll see the devastating health outcomes we saw last year.

Roller coaster weeks (like we saw in July) are bound to come again. But it’s always helpful to examine the drivers behind the moves.

Could the delta variant cause the economy to slow down?

It’s hard to say at this point. The rosy projections about the economy have been based on a swift return to normal from the shortest recession in history.

If surging case counts cause a resumption of business and travel limits, we could definitely see a hit, especially in recovery-dependent industries like airlines, cruises, and hotels.

Supply chain issues are still causing materials shortages, creating delivery delays of goods, and potentially triggering slowdowns in industries such as building and construction.

However, consumer spending is still very strong and the economy is in way better shape than it was last year.

Bottom line: we could see some economic complications due to the delta variant and we’re likely to see more market volatility ahead, especially if economic data disappoints.

I’m keeping an eagle eye on the trends and will be touching base with my clients if I feel we need a change in strategy.

And yes there is a massive $3.5 trillion budget deal working its way through Congress. It’s got a lot of moving parts that may affect taxes, Medicare, and much more. I’ll be communicating more when we know more about how it’s likely to shake out.

Calmy,

Brandon