Big tech leads biggest daily drop for market since June

A perspective from E*TRADE Securities 09/08/20

It’s been a while since we’ve been in the throes of the type of volatility that defined the market earlier this year, so investors may have experienced some post-traumatic stress when the S&P 500® slid 3.5% and the Nasdaq Composite tumbled 5% on September 3.

The sell-off continued through Labor Day weekend (albeit to a lesser extent), and as of September 8, was the market’s biggest setback since June—just a week after stocks wrapped up their best August in decades. 

Here’s some perspective on the recent events and what to keep in mind for the days and weeks ahead.

Why the volatility?

The market has had a remarkable run since its March low, with the S&P 500 gaining roughly 60% over the past five months. Given the magnitude of that rally, volatility is to be expected—even the strongest trends have setbacks. For example, while big tech has been among the hardest hit areas during the recent sell-off, the sector has also experienced outsized gains, and many analysts view the pullback as a “healthy” correction for some stocks that have been climbing at a steady clip since the peak of the coronavirus downturn. 

It appears some investors may be lightening up on tech and health care and bulking up on industrials and financials, a significant rotation out of two favored sectors and into two that are somewhat downtrodden. And although a sudden sell-off in tech may catch market watchers off guard, adding breadth to the market could be a good thing.

The start of something bigger?

Nonetheless, investors may be wondering if the downturn is just a pullback, or the start of something bigger. It may have also stirred up the infamous “How will I know when the market has stopped going down?” question. 

Of course, both are unanswerable. But it may help to consider how much the market, and the economy, has overcome this year. The market has fully recouped its February–March losses, both the Federal Reserve and Congress have unleashed groundbreaking policies and legislation to help the labor market and American consumer, progress has been made on the vaccine front, jobless claims are trending downward, and the economy is generally making slow but steady progress toward recovery.

Keeping it in perspective

September ushers in a historically volatile period for the market, and this month has a particularly bearish reputation. Certainly, wide price swings are never comfortable, but investors should keep in mind that periods of volatility like this are not uncommon, especially on the heels of an epic rally, and should be taken in stride. 

Here are some important points for the weeks ahead:

  • Asset allocation and diversification are powerful tools. Diversifying a portfolio across asset classes and investments is the fundamental framework of a long-term investor and can help provide guardrails for weathering all market conditions. 
  • Assess risk tolerance. During periods of record-setting equity performance, it’s easy to lose sight of how much risk you are truly comfortable with. Investors with overly aggressive asset allocation may decide they want to adjust their mix to something more conservative. Alternatively, investors who are comfortable with their risk level may want to reassess the performance of riskier assets and rebalance accordingly. Those with managed accounts can view their allocations on the Portfolios page. For those with standard brokerage accounts, we have a portfolio analysis tool that can help: When you’re in a particular portfolio, click on the Analysis tab and scroll down.
  • Keep emotions in check. This is the biggest challenge. Just as investors should be cautious about chasing returns in a market at all-time highs, letting emotionally charged events and panic-inducing headlines influence trading in a “risk-off” environment could end up doing more harm than good. History has proven that trying to time when to enter and exit the market is typically a fool’s errand. 

Bottom line: Maintain a long-term perspective. Investors with long-term horizons shouldn’t be surprised to see volatility from time to time. There will always be something moving the markets in either direction at any given time, and at the moment, many are pointing to uncertainty around COVID-19 and the outcome of the upcoming election. Don’t let near-term noise derail your plan—keep investment decisions aligned to longer term goals and ignore the day-to-day bumps. 

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