A sense of calm has continued to settle over markets after the eruption of volatility a couple of weeks ago. Stocks are on pace to finish the week with healthy gains, and the S&P 500 Index is now only a couple of percent below its previous high. The VIX volatility index, which spiked up to a rare reading of 65 during this episode, has already plummeted back down to 15. The equity rebound is being boosted by recent economic data that has mostly been on the firmer side, and helped to quash fears that the economy is rapidly deteriorating. It also helped that the latest inflation reports came in on the softer side again, eliminating any doubt for most observers that the Fed has the evidence it needs to begin cutting rates at their next meeting in September.
So, does this mean that the current correction has fully run its course, and it’s nothing but blue skies ahead? Well, even though this has been an impressive rebound, we can’t be sure of that. Seasonal tendencies and a looming election caution that there could be some additional volatility in the next couple of months. Instead, what we can do is try to put this latest pullback into some context. On an intraday basis, the S&P 500 fell just shy of -10% (-9.7% to be precise) between July 16th and August 5th. History shows us that declines in the neighborhood of 5-10% are very normal, and on average happen a few times every year. Shallower “dips” happen much more frequently, while deeper drawdowns usually only occur every 2-3 years. In other words, despite some of the headlines, so far this hasn’t been anything out of the ordinary.
Source: Ned Davis Research, S&P Dow Jones Indices, as of 8/6/24
Carl Noble, CFA
Senior Vice President of Investments
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