On a roller coaster, the ride may be thrilling, but you end up right back where you started. The stock market has been on a bit of a roller coaster ride lately, though for perspective, it is coming off of record highs. In the lead up to the market drop on Monday, stocks had gained about 33% in 8 months, reaching new record levels before descending last week. Monday saw a 2-3% drop in stock indices, while Tuesday markets clawed back a 1% gain. Wednesday fizzled out after a strong start, drooping by about 0.8%. Futures are indicated up this morning.
Japan’s stock market fell 12% on Monday, but regained about 11% on Tuesday and 1% Wednesday. South Korea’s Kospi index fell 8.8% Monday, and Bitcoin dropped below $54,000 from more than $61,000 on Friday. European markets have mostly recovered their Monday stumble already. A number of factors are at work, from the yen carry trade unwinding, to slower economic growth expectations. The 10-year yield has dipped below 4% in August and the yield curve between 2 years and 10 years is coming out of a prolonged inversion period that typically signaled recession.
Meanwhile, the S&P 500 is still up about 10% this year after a 19% gain through mid-July and following the recent downdraft. The Magnificent Seven stocks, which had been highflyers for most of the year, have fallen by double digit percentages from their peak levels. While they won’t turn into the Seven Dwarfs anytime soon, volatility has clearly crept into the market.
It’s A Small World After All
Disney#, which has the Rock ‘n’ Roller Coaster and TRON Lightcycle Coaster in Florida, recently reported quarterly earnings. Unfortunately, Disney’s earnings have not been much of a thrill ride lately. Disney’s streaming unit, which includes Disney+, Hulu and ESPN+, became profitable a quarter ahead of schedule. However, the operating margin in streaming was only 0.7%. This is a barely breakeven level, but good progress after previously losing $1 billion per quarter. Since the launch of Disney+ about five years ago, Disney has lost more than $11 billion in this business.
Disney’s six global theme-park resorts along with its cruise line, consumer products, and videogame licensing (Experiences), saw revenue increase slightly. However, operating income fell 3.3% year over year in spite of steady parks attendance numbers and visitor spending. Disney expects challenges for the theme-parks business for possibly a few more quarters, and operating income to fall due to softening demand at the U.S. theme parks, competition from the Olympics and slower demand in China. Disney has some great franchises to build upon, including Marvel Studios, and may eventually get its mojo back. But content is expensive and consumers are getting stretched.
Consumer caution is showing up in other travel related areas as well. This week we heard from Airbnb, the vacation rental company, which reported disappointing guidance. Airbnb Q2 results were mostly in line, but it is seeing shorter booking lead times globally, signs of slowing demand from US guests, and a slower Q3 ahead. Another travel company, TripAdvisor, also disappointed due to macro travel headwinds, intense competition, and moderating pricing. Marriott Hotels said it is seeing moderation in spending across customer segments as well. Delta and United Airlines both offered weaker outlooks even as industry prices remain depressed with excess capacity.
The Haunted Mansion
Mortgage interest rates dropped last week to the lowest level since May 2023, causing a pickup in refinancing mortgage demand. Total mortgage application volume rose 6.9% last week compared with the previous week, according to the Mortgage Bankers Association. The average interest rate for 30-year fixed-rate mortgages declined to 6.55% from 6.82%.
Applications to refinance a home loan, which are more sensitive to rate changes, increased 16% for the week and were 59% higher than the same week one year ago. There are less than 1 million borrowers who can benefit from a refinancing, and trim at least 75 basis points off their current rate, but some are apparently biting. Applications for a mortgage to purchase a home increased only 1% for the week, but were down 11% from a year ago. The inventory of homes for sale is beginning to increase gradually in some parts of the country, but purchases are still sluggish.
There are several risks still ahead this year, including a further unwinding of the yen carry trade, along with uncertainty around inflation, economic growth, interest rates and the upcoming election cycle. However, stock returns have beaten more mundane bond returns over time and historically have bested inflation, which erodes purchasing power. Over five-year rolling periods during the past 100 years, stocks have been more than twice as volatile than fixed income investments, but have generated more than twice the returns.
During any given year, the stock market may face declines, but may still end positively for the full year. Last year the S&P had an intra-year drawdown of about 10%, but ended the year up 24%. Since 1980, the average intra-year drop has averaged about 14% while the annualized return has been about 12% per year, or 8.4% per year adjusted for inflation. The S&P has risen 33 out of the last 44 years overall, meaning about 75% of the years were positive. Drawdowns are inevitable throughout bull and bear market cycles, and we are in the midst of typical seasonal weakness through August and September, so expect more peaks and valleys ahead.
The Disney ride “It’s a Small World” is much calmer than any roller coaster, has no wild ups and downs, and often closes when there are fireworks. It is a nice respite for a short period, but Disney aptly placed that ride in Fantasyland.
Christopher Crooks, CFA®, CFP® 610-260-2219