Market volatility has increased over the past 3 weeks as the S&P 500 fell from a high of 5647 on July 16th to a low of 5189, a drop of more than 8%, before recovering almost half that drop by Friday. The drop has many asking what is bothering stocks and where do we go from here?
Despite what news sites tell us, there is rarely one ‘reason’ for volatility like this. The world is a complex place and there can be more than one cause. Here are a few of the potential causes for the 8% drop.
1. War in the middle east
The war between Israel and Hamas has been raging for almost a year now, but Israel’s assassination of Hamas leader Ismael Haniyeh in Tehran on July 31st significantly increased the risk of a broader middle east war, and a more direct confrontation between Israel and Iran. A broader confrontation could spike the price of oil and cause a significant blow to the global economy.
2. Weak Employment Numbers
July’s Employment report was a significant disappointment. The unemployment rate rose to 4.3%, leading many to conclude that the U.S. is heading for a recession.
3. Semiconductor Clampdown
On July 17th, the Biden administration announced proposed restrictions which would severely limit foreign purchases of high-end Semiconductors. The restrictions are most significantly aimed at China. This may be good policy, but it significantly impacted high flying Nvidia, one of the market leaders. Nvidia is down more than 20% from its highs.
What’s Next?
So where do we go from here? Thankfully, this week there has been some good news. First, Israel has agreed to peace talks with Hamas, brokered with Egypt, Qatar, and the United States. There is still a risk that Iran will retaliate and send the region into a broader conflict, but the sides appear to be attempting diplomacy. Secondly, the August 3rd unemployment numbers showed a decline in unemployment claims, softening July’s disappointing employment report.
The disappointing employment numbers have increased the probability that the Federal Reserve will begin lowering interest rates in September. Few are talking about inflation any longer, and many are beginning to wonder if the Federal Reserve has waited too long. If the Federal Reserve does begin to lower rates it could help support asset prices in both the stock market and real estate market.
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