Releasing Some Steam

by Financial Design Studio, Inc. / September 10, 2020

Fee Only Financial Advisor Robert Stoll Deer Park Barrington Chicago

Large growth stocks have had a relentless march higher since the COVID lows seen in the spring. In the last week, we saw these same stocks drop a lot in just a few days. Is there more to come or are these stocks just releasing some steam?

Paying close attention to short-term moves in the stock market can be dangerous. There’s so much noise that drives stocks from one day to the next that it’s easy to get caught up thinking stocks are moving for one reason when they’re actually moving for an entirely different one.

The experience of the last week is a good example of this. Since bottoming out in late March, stocks have staged a huge rally, pushing the S&P 500 back to record highs. All of a sudden, stocks dropped over 7% in three days with some of the leading stocks taking much bigger hits.

S&P 500 sell-off September 2020

Is this the start of a larger move lower, or just a healthy correction? Nobody know for sure, but there are signs that this might’ve simply been a healthy repositioning. One way to see this is to look at how various sectors of the stock market have performed in the last week.

S&P 500 Sector performance September 2020

The two sectors that drove the market higher in recent months – Technology and Communications – both suffered drops while “old school” sectors that have lagged (Financials, Materials, and Industrials) were flat to up.

This suggests that large investors were simply repositioning their portfolios after a strong run in their biggest holdings. In other words, it looks more like releasing some steam. Unfortunately, in this day and age, these events can lead to abrupt, sharp pullbacks that leave investors wondering what’s going on.

But it’s also a good reminder that markets don’t move in straight lines. And what “works” one day doesn’t mean it will continue working forever. Well-diversified portfolios help smooth out the impact of these events so you can stay the course with your investment plan.

Wondering how this affects your future finances? Schedule a call with Financial Design Studio, financial advisors in Deer Park, to discuss your portfolio today.


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