This isn’t a market forecast—it’s a wake-up call.
Risk appears to be rising quickly as we enter the second half of August. Summer is over for financial advisors and self-driven investors. Historical patterns are conspiring with modern market complexities to set up an increasing level of risk. This isn’t a dip we’re talking about.
This risk has been building up through 15 years of zero interest rate policy from the Fed, as well as consumer behavior that can only be described as “shop til you drop.”
With news flying at us about credit card debt levels, student loan repayments, high mortgage rates, net savers becoming net debtors and a host of geopolitical issues, it’s not hard to find a culprit for recent market weakness.
When you include ominous technical patterns, it adds up to a high-risk period in late summer.
Financial Advisors Eyeing Risk
From a technical analysis standpoint, today’s S&P 500 exhibits a similar pattern to not one, but three August-to-September wrecks of the past: 1987, 2000 and 2022.
This is where learning to apply some of the portfolio-building advantages of ETFs can be a most valuable asset to those who manage other people’s money, or their own.
First, there was the infamous (and likely forgotten or unknown for many of today’s investors) 1987 crash. The crash itself was in October, but a look back at the charts shows that it really started with a dip in August, that chart-wise had shades of what we are seeing in the market now. Back in 1987, that dip was followed by a quick recovery, and then the Black Monday crash on Oct. 19, which saw the S&P 500 and Dow fall by over 20% each in a single day.
The year 2000 was another period in which, chart-wise, there are similarities to what is quickly building in today’s S&P 500 index picture. As September of that year began, stocks quickly transitioned from a risky market that wouldn’t break to a decline of over 40% that did not flame out until March 2003. That marked the first time the S&P 500 fell three straight years, and remains the only time that has happened.
History Can Teach Financial Advisors About Risk
And, we can also look all the way back to last year at this time. In August to September of 2022, the S&P 500 fell from 4300 to 3600. That peak is a mere 100 S&P points (about 2%) from where the index has traded recently.
But if you don’t have the patience or belief in the technical analysis approach, there’s a much simpler set of concerns that would make a rough August to September for stocks a logical next step after a weird year of narrow markets. Don’t forget, the markets have been led by the beloved “Magnificent Seven” stocks, some of which are breaking down pretty hard right now.
It is funny how 20% flash declines in some highfliers don’t get much press. But if your job is to have eyes in the back of your head when it comes to the markets (part of the definition of an investment advisor!), these are additional points of evidence that help make the case—ot that a steep decline will occur, but that the risk of one is elevated.
The 4.30% yield level for the 10-year U.S. Treasury was reached this week. That’s been a spot in which the stock market has become a much more treacherous place. But it has been 15 years since we saw that level (2008), so naturally the emotional jolt that some of us get from seeing that level does not sink in with everyone. But psychologically, it is an important level, which probably needs to hold in order to keep the bears at bay.
Then there’s a Goldman Sachs analyst, correctly pointing to so-called 0DTE options' creating havoc for market makers, accentuating sharp S&P 500 declines we’ve seen in recent days. That has a very 1987 feel to market veterans.
Maybe nothing will happen. Maybe the Fed will come in again and save us all. Or, as we have seen in the past, the fears build up, and the price action follows through to the point where investors have a great excuse to dump stocks, while long-term interest rates spike, which proceeds to un-invert the yield curve. That has spelled recession the last eight times. Maybe it will again, maybe not.
But for advisors, with all of the above, the best path is to get educated, confront these threats and assess them before your clients start asking about them, and be ready with the tools to play defense and offense at all times. That is where the vast resources and insight found within etf.com can be an advisor’s new best friend.
