In August 2024, a surge of fear swept through the financial markets, echoing the uncertainty last seen during the COVID-19 pandemic. The spike in Google searches for “recession” during this time reflected growing concerns among investors and the public alike. As the stock market dropped rapidly by 10%, volatility reached levels not seen since the early days of the pandemic causing panic selling. But as the dust settled and smart money loaded up, the markets staged a dramatic recovery, leaving many to wonder if this panic was just a blip in the ongoing bull market or a harbinger of a more significant economic downturn.
A Surge in Recession Fears and S&P 500 Panic Selling
August 2024 was marked by a sharp increase in recession fears, as evidenced by the spike in Google searches for the term “recession.” This heightened anxiety was mirrored in the stock market, where volatility reached its highest point since the COVID-19 crisis. The S&P 500, a experienced a sudden and steep decline, falling by 10% in a matter of days. This rapid drop triggered widespread panic among investors, with many fearing that the long-anticipated recession had finally arrived.
The American Association of Individual Investors (AAII) survey reflected this sentiment shift, with 37% of investors turning bearish during the market’s steep decline. The sudden change in market sentiment was alarming, but the quick reversal in stock prices soon after suggested that this panic might have been overblown.
Smart Money vs. Retail Divide
As the market was gripped by fear, a significant divergence emerged between institutional and retail investors. Data suggests that while retail investors were selling off their holdings in a frenzy, institutional investors were quietly buying the dip. During this period, institutional players purchased approximately $4 billion worth of stocks, while retail investors offloaded around $1 billion.
This behavior underscores a critical difference in how these two groups react to market volatility. Retail investors, driven by fear and short-term market movements, often sell at the worst possible times. On the other hand, institutional investors, with their long-term perspective and deeper market understanding, tend to capitalize on these moments of panic by accumulating positions at discounted prices.
Market Bounce and the Recession Debate
In the aftermath of the August panic, the stock market staged a violent rebound, recovering almost all of its losses. This swift recovery has led some to question whether the recession panic was merely a temporary shakeout designed to drive retail investors out of the market before the next leg of the bull run.
However, while the market’s bounce has been impressive, it doesn’t necessarily mean that the underlying economic concerns have been resolved. The Federal Reserve’s aggressive interest rate hikes over the past year have yet to fully impact the economy. Historically, there is a lag of about 18 months between rate hikes and market volatility, which means we may still see increased volatility in the coming months.
Lessons from the Late 1990s
The current market environment bears some resemblance to the late 1990s, a period characterized by elevated stock market volatility and high interest rates. During that time, the initial spikes in volatility led to strong rallies as the market rebounded to new all-time highs. However, by 2000, the U.S. economy began to slow, leading to a prolonged bear market.
The parallels between then and now suggest that while the market might continue to rally in the short term, the risks of a recession are far from over. The recent rise in the unemployment rate to 4.3% in July 2024, typically a sign of an impending downturn, further supports this cautionary outlook. Although, it is important to note that the spike in unemployment was partially attributed to a hurricane in Texas, which likely skewed the numbers.
Watching the Job Market
Despite the market’s recent recovery, the labor market remains a crucial indicator to watch. Last week’s initial jobless claims came in at 227,000, significantly below expectations, suggesting that the labor market has not yet cracked. However, the 260,000 level remains a critical threshold. if claims rise above this, it would likely signal the start of a recession.
For now, the latest data provides some relief. This is why we advised against selling equity positions during the August panic, even when the market broke below a key uptrend line. With the market now regaining that trend line, the recent breakdown looks like a false alarm, reinforcing our strategy of holding on to positions.
Looking Ahead: A 6,000-Point Target for the S&P 500?
As we look to the future, the question is whether the current rally has more room to run. We’ve been eyeing a 6,000-point target for the S&P 500 since December 2023, when the index broke out of a two-year basing pattern. With the S&P 500 holding a strong uptrend and breaking above a key downtrend line, the odds of reaching that 6,000 level have significantly increased.
Conclusion
The events of August 2024 highlighted the deep-seated fears of a recession among investors, but the subsequent market rebound suggests that these fears may have been premature. While the market’s recovery is encouraging, it doesn’t eliminate the risks posed by high interest rates and potential economic slowdown. By avoiding panic-driven decisions, similar to smart money, investors can navigate the current volatility and position themselves for potential gains as the market continues to rise. At Game of Trades, we’re well-prepared for this environment, but are closely watching for recessionary signals. Click here to sign up! Subscribe to our YouTube channel and Follow us on Twitter for more updates!
