What We're Seeing: Volatility Emerges – 5 August 2024

The Week in Brief

Volatility returned to markets in early August. Stocks briefly sold off amid renewed Fed concerns and global growth worries. The move was sharp but short-lived, with markets reversing course quickly as buyers stepped in.

The speed of the recovery was notable. What looked like the start of a meaningful correction turned into a dip-buying opportunity. This pattern has repeated throughout 2024: pullbacks are shallow and quickly absorbed.

What Triggered the Move

Several factors converged. The Fed’s messaging remained hawkish, with officials emphasising that rate cuts are not imminent. At the same time, economic data from China and Europe raised questions about global demand. The combination spooked investors, prompting a rush for the exits.

But the selling was not sustained. US economic data remains solid, corporate earnings are holding up, and the labour market shows no signs of cracking. Investors who sold into the weakness found themselves chasing the market higher within days.

Sector Behaviour

Defensive sectors held up during the brief downturn, as expected. Utilities and consumer staples attracted inflows from nervous investors. When the rebound came, cyclicals and growth names led the recovery.

The episode highlighted the importance of staying invested. Timing market corrections is notoriously difficult, and those who wait for perfect clarity often miss the move.

Our Read

We view the early August volatility as a reminder that markets do not move in straight lines. Corrections are healthy, clearing out weak hands and resetting sentiment. The fact that this one was so quickly reversed suggests underlying demand for risk assets remains strong.

The macro setup has not changed materially. US growth is resilient, inflation is moderating, and the Fed is on hold rather than tightening. This is a supportive environment for equities, even if it comes with periodic volatility.

Our positioning remains unchanged. We favour quality stocks across styles, with a tilt toward areas that benefit from economic resilience. Cash levels are modest, as we believe the opportunity cost of sitting out is too high in the current environment.

What Could Change Our View

If the selling had continued and broken key technical levels, we would have reassessed. A sustained move lower, driven by deteriorating fundamentals rather than sentiment, would warrant a more defensive stance. Similarly, a sharp slowdown in US consumer spending or a credit event would alter the picture. For now, we are treating the August dip as noise rather than signal.

This is informational commentary, not investment advice.