Lessons from August 2024: How Markets Rebounded and What We Learned

Recently we experienced a $6.4 trillion USD decrease in the share markets leaving even seasoned investors unsettled. However, two weeks later, we’ve since seen are bound; like nothing ever happened.

While we can’t predict if this trend will continue, we can use this as an effective reminder to stay the course. After all, it’s during times of volatility where good investing habits are often tested the most.

In this article, we look at:

• What happened in the share markets

• The suspected drivers of share market volatility

• Timeless investing principles to remember

On 5 August 2024, we saw the volatility index (VIX), a gauge for stock market volatility or investor sentiment, surge to almost 40, far beyond its usual range of 10-15.

The VIX measured the price movements of the S&P 500, the more dramatic the price swings the greater the volatility of the index as shown below.

Additionally, we saw indices such as the S&P 500 fall 3.0% and the NASDAQ decrease 3.4%. However, in just 2 short weeks (5 August – 19 August) the markets have since rebounded with the S&P 500 even seeing an 8-day winning streak.

Like many notable historical financial events, there is no one straightforward answer. What happened this month was no exception.

However, there are a couple of key events that were speculated as contributing to this reaction.

On Friday 2 August, the July jobs report for the US showed an unexpected rise in unemployment to 4.3% from 4.1% in June 2024 with lower-than-expected job growth. 

This increased rate of unemployment created fear that the largest economy in the world could be falling into a recession. The following Monday 5 August, we saw the price of US shares fall as investors reacted to this sentiment.

Historically, Japan has had some of the lowest interest rates in the world.

The low interest rates incentivise many foreign investors to borrow money from Japan as it offers cheaper debt relative to anywhere else in the world. And that’s exactly what many large institutional investors did.

However, around the beginning of August, the Japanese central bank, the Bank of Japan, unexpectedly increased its interest rates from 0.10% to 0.25%. This 150% hike quickly prompted a flurry of reactions across global markets.

The Japanese main index the Nikkei 225 fell 12% on Monday 5 August, only to rise 10% on Tuesday 6 August. Overall, the index is back around 38,000 in the range of where it started the month.

Large institutional investors, especially those from the U.S., who had taken advantage of Japan’s historically low interest rates, sold off their assets to help offset the 150% increase in their borrowing costs.

If we can take away anything from this month, it’s that we have no idea what the future holds -even most of the professionals couldn’t have seen this event coming! However, these market events have happened before and will continue to happen again.

So, remember these principles the next time you see scary financial headlines:

The quick market recovery underscores the importance of staying calm during periods of volatility. Acting impulsively can lead to regrettable decisions. A fall in prices today, does not mean the trend will continue tomorrow.

Short-term market movements should not distract you from your long-term financial goals. The cyclic nature of markets means that staying invested typically pays off over time.

Regular investments, even during market downturns, can average out costs and yield significant benefits as markets recover. KiwiSaver contributions are an excellent example of how this strategy works. Another way to look at a drop is that your next purchase is cheaper.

Constantly monitoring investments can cause unnecessary stress and poor decision-making. It’s better to focus on the long term and trust your investment strategy.

Diversification across multiple sectors, countries and asset types helps mitigate risk. Investing in diversified funds such as the Balanced and High Growth Funds are an easy way to do this.