Few stocks remain untouched in a market correction. An attempt by the editorial team to find out what asset managers are buying during the dip immediately fails: «Timing a bull-market correction is pointless,» they say.
Everyone with an internet connection knows by now: stocks have fallen worldwide. The Japanese stock market said ‘sayonara’ to its 2024 gains in its worst day in forty years (-12%); the S&P 500 and Dow Jones had their steepest drop in two years (-3%), and short-term interest rates finally dipped below the 10-year rate after more than two years. That volatility was neatly picked up by the VIX. Before lunchtime in New York, the volatility index surged from 23 points to 65 points.
Former President Donald Trump spoke of a real “Kamala Crash” and the “Great Depression of 2024” on his media platform Truth Social. Retail investors at Fidelity, Vanguard, and Schwab were so shocked by the news that they rushed to check the damage. With overloaded servers, they couldn’t access their portfolios for a while.
While LinkedIn and the former president might suggest otherwise, it’s small beer for professional investors. «A market correction is simply the price you pay for the superior returns of stocks compared to other categories,» said Han Dieperink, CIO of Aureus Vermogensbeheer. He is one of many who call timing the bottom pointless.
Dieperink sees the drop as a typical bull-market correction. «In recent weeks, small caps, cyclical stocks, real estate, and financials were popular on the stock exchange. You don’t buy those if there’s a short-term recession,» he told Investment Officer.
According to Dieperink, it resembles the crash of 1987. «Back then, the market also expected a recession that never came. The irony this time is that the chance of a recession, according to research among economists, reached its lowest point in years in June.»
Fear of recession
According to Dieperink, the market reaction is exaggerated. «There were three disappointing macro figures last week used as arguments for a recession. Even together, those macro figures are not a reason to expect a recession,» Dieperink said. He points out that while unemployment is rising, it’s due to an increase in labour supply, not a decrease in demand.
The latter would be a more harmful signal for the economy, while the former suggests that the labour market and the economy are more stable than the rise in unemployment indicates. From a historical perspective, unemployment in the world’s largest economy appears manageable, according to data from the St. Louis Federal Reserve.
Further data may indeed support the probability of a recession, notes Mark Sobel, former adviser at the US Treasury and IMF, and chairman of think tank OMFIF. «But for now, the reactions to the US July employment report and the emerging critique of the FOMC and their July decision are overdone,» he writes on the OMFIF website. «Markets should chill.”
Peaking VIX is a good sign
That the VIX, the volatility index also known as the “fear gauge” of the S&P 500, peaked after a 180 percent rally is at the very least a good sign for investors looking to get in. According to Dieperink, a peak often coincides with the dip in the market.
Simon Wiersma, head strategist at ING, also points out to his clients in a note that a peaking VIX could be a good buying opportunity. Wiersma can understand that investors might get nervous. But after a period of low volatility, we now see increasing volatility in the markets and a correction in stocks and sectors that have risen the most since the end of last year, he wrote in a note to his clients.
«That is quite normal, unfortunately never perfectly predictable, and can be more intense than you might expect. No reason for panic,» Wiersma wrote.
Good corporate results despite market correction
Despite the falling prices, corporate results remain strong. In the US, 80 percent of companies exceed expectations, with an average profit growth of 11 percent. In Europe, almost two-thirds of companies exceed analysts’ expectations. The average profit growth expectation for the next twelve months has been raised for both the S&P 500 and the European Stoxx Europe 600 index.
Luc Aben, chief economist at Van Lanschot Kempen, sees no reason to change the investment policy for a diversified portfolio. For the private bank, this means maintaining the focus on stocks, with a strong position in European and American government bonds as a counterbalance. Aben does note that cyclical sectors directly dependent on consumers are performing less well, while defensive stocks are pulling up the average. The MSCI ACWI Defensive Sector Index ended the trading day with a small gain of 15 basis points.
«This fits the current economic conditions in the US and the eurozone. Globally, the momentum for expected corporate results over a twelve-month horizon is upward,» he said.
Market corrections and investment strategies
Dieperink, who is more optimistic about the economy, also sees timing bull-market corrections as a pointless exercise. «If you want to time the top to exit and the bottom to enter exactly, you have to get it right twice and incur costs twice,» he explains.
«Moreover, you run a significant risk of missing the further upward movement. Such market corrections are simply the price you pay for the much higher returns on stocks compared to many other asset classes. Investors have a long horizon, and market timing is not part of that.»