Opinion: Market drop: Time to check your risk level

Richard Baker

My son called me a few days ago and said the transmission was going out of his truck because it was going 6,000 RPM when it shifted. I told him to check the fluid while the engine was still hot when he got home. He said, “I forgot cars even have transmission fluid.” I think investors forgot August is a downer for investments.

Historically, stocks tend to be a bust in August. July was the eighth positive month out of the last nine, but it was quickly forgotten when August started with a big market drop. The main reason was the U.S. Labor Department report on Aug. 2, which showed that the unemployment rate rose sharply to its highest level since 2021. This led many investors to feel there was a chance the U.S. economy could go into a recession.

Here are some of the reasons that made the stock sell-off worse than usual:

• Overly optimistic outlook (bullish sentiment). Investors had become overconfident with stocks, especially tech stocks, and were ignoring some market fundamentals that showed the stock earnings didn’t support the high price.
• Elevated valuations. Some major stock prices were much higher than their historical averages. For example, Apple was trading at 30 times its earnings estimates, well above the 10-year average of 19, according to LSEG Datastream. Microsoft was trading 31 times above its earnings estimates when its 10-year average was only 25.
• August always stinks. August is only one of three months with a historically negative rate of return since 1945.

Is it time to panic? No. Pullbacks and corrections, though hard to stomach, are a normal part of investing. Think of them as tolls to pay on the road to attractive long-term returns. The major stock indexes have averaged a more than 11% gain since 1950 through some of the worst wars, terrorist attacks, recessions, financial crises, pandemics and natural disasters. The most interesting part is that stocks have averaged that much gain despite losing 10% at some point every year, even in up years.

The market could turn upward if the Federal Reserve begins signaling with its various speakers that it may cut rates more aggressively. The Fed recently hinted at a 0.25% rate drop in September, which the market is already counting on. The market could rebound nicely if the Fed begins mentioning that a more significant 0.5% rate cut is possible.

Market volatility isn’t enjoyable but is part of the investing process. This situation in stocks, the possibility of a larger war in the Middle East, and the potential circus of a presidential election are all reasons you should invest according to your risk profile.

I remain neutral on stocks but will have a shopping list of buying opportunities if the S&P drops below 5150. The fundamentals of the majority of the market still look good enough to keep this market going even as the economy slows into the election. Be patient and stay in your risk profile.

My son called me back a few minutes later and told me the transmission fluid dipstick was completely dry. He filled it up and now says his truck “runs like a champ.” He’s now going to check the level more regularly, and in weeks like this, I keep reminding investors that they should check their risk level more frequently, too.

Richard Baker, an accredited investment fiduciary, is the founder and executive wealth adviser at Fervent Wealth Management LLC in Springfield. He can be reached at richard@ferventwm.com.