What 3 Advisors Make of Wall Street's Crazy Week

What You Need to Know

The recent rollercoaster in the markets gave financial advisors the chance to review some investing fundamentals with clients.
As long as people keep the swings in perspective and avoid emotional trades, navigating volatility isn’t rocket science.
Markets could drop in the run-up to the presidential election, but that scenario would present its own opportunities.

Equity market investors breathed a sign of relief on Thursday when Wall Street experienced its strongest daily gain since November 2022, with the S&P 500 rising 2.3% and the Nasdaq Composite adding 2.9%.

Analysts pinned the rally, which came after a series of dark days for investors, to a drop in U.S. unemployment claims that eased fears of an imminent economic slowdown. Just three days earlier, investors had been alarmed by a notable uptick in the unemployment rate and the decision by the U.S. Federal Reserve to hold interest rates steady at a two-decade high.

As the dust settled and markets held steady on Friday, a number of market watchers offered some timely advice for long-term investors, starting with the fact that volatility is a normal and healthy part of the markets. As long as people keep the swings in perspective and avoid emotional trades, they argued, navigating volatility is an achievable end.

Healthy Profit-Taking & Price Swings

Among the week’s commenters was Jason Britton, president and CIO of Reflection Asset Management.

“The sudden surge in volatility, at least at this juncture, is not concerning,” Britton said. “Sudden spikes are typically speculators piling on or unwinding positions, especially those that are leveraged.”

This seems to be what drove much of the week’s market moves, according to Britton.

“Many professional investors were heavily leveraged to the ‘yen carry trade,’ and when the [Central Bank of Japan] tightened recently, it sent investors running to cover positions,” Britton explained. “They covered by profit taking in the mega-cap tech trade.”

As Britton emphasized, most U.S. earnings reports for the second quarter have offered good news, “at least so far.” This fact should provide a stabilizing force as the markets anxiously await the Federal Reserve’s next move.

“The thing to watch for is sustained downward pressure on the indices — over the next two weeks,” Britton said.

A ‘Shift from Greed to Fear’

Samuel Wagner, the founder and chief financial guide at WealthGuides, offered a similar take, suggesting the theme of the week was a “rapid shift from greed to fear.” This is something that happens regularly in the normal course of market cycles, he said.

“Last week, the Department of Labor reported that unemployment had risen to 4.3%, marking a 0.6% rise since January,” Wagner observed. “That’s the fastest rise since the pandemic. In addition to that, Warren Buffet’s Berkshire Hathaway disclosed that it sold nearly 50% of its position in Apple in the second quarter.”

Such profit-taking is normal and healthy, Wagner noted, but it can cause spark short-term fears about what comes next, especially as economists suggest a U.S. recession looks more likely now than it did a week ago.