Published August 9, 2024
It’s been quite a week for markets. Addressing various topics around the market stress, we offer thoughts from Blake Millard. Here’s Blake commenting on Monday’s market selloff where futures were down as much as -5% before cutting that loss by day’s end.
“Days like today are a reminder of why being an investor can be so hard.
Over the last three weeks, from their most recent respective highs, the S&P 500 has fallen by -8.5%, the Nasdaq-100 has fallen by -13.5%, and the Russell 2000 has fallen by -11.3%.
In the grand scheme of things, this is simply a blip on the radar — but after nearly two years of “up and to the right” price action, it sure feels like the sky is falling and falling fast.
During periods of market stress, I always find it helpful to level set expectations and remind investors that periods like the current stretch are perfectly normal for long-term investors. When you invest through multiple cycles, we should no longer find periods like this surprising. Quite the opposite, in fact – we should always be expecting the next bout of volatility or a stock market pullback around the corner.
Below is a chart from the venerable Ben Carlson. It shows 5% pullbacks have happened nearly every year over the last century. 10% corrections – like the current state of markets – occur roughly two-thirds during each calendar year. Even a 15% drawdown occurs quite regularly at 40% of historical calendar periods. It’s only the 20% or greater drawdowns that occur rather infrequently.
Meaning, the current bout of market weakness is perfectly normal for anyone who has been investing in financial markets for more than a year or two. Volatility is a natural part of the investing process, reflecting market uncertainty and opportunities.
The other chart I often reference during periods of market declines comes from J.P. Morgan.
It shows that since 1980, the S&P 500 has averaged an intra-year decline of 14.2%, yet at the same time the index has also managed to produce a positive calendar return 75% of the time.
Wall Street ramps up forecasts on timing, size of interest rate cuts
The pressure on the Federal Reserve to cut rates is rising in the wake of heavy selling pressure in the stock market (although this falls outside the scope of the Fed’s stated mandate, to be clear) and a disappointing jobs report that’s stoking renewed recession fears of a hard landing.
A slew of weaker-than-expected economic data over recent months has many arguing the Fed’s current policy rate is far too restrictive given the success on the inflation front and some softening in the labor market. This was highlighted most recently by last week’s July jobs report triggering a closely watched recession indicator dubbed the Sahm Rule.
The bond market is responding quickly, now betting the Fed will be forced to act more aggressively than expectations just a few short weeks ago.
Remember, the bond market is the largest of all markets and arguably moves all other asset classes. See its relative size (and thus its importance) below. It’s impact and influence cannot be dismissed.
For several months, the 1st cut of 25 basis points – just a fraction of the amount the Fed raised rates during 2022-2023 – was fully priced into the upcoming September 18 meeting.
In just the last few days, the pendulum has firmly swung in favor of 50 basis points, or a double hike if you will.
It’s a bird… it’s a plane… it’s the volatility index ??!?
The CBOE Volatility Index (VIX) gave us its biggest pop today since it exploded during the early days of the covid-19 pandemic. Today was the 4th most volatile market day in the last four decades.
The VIX briefly spiked to 65 today, a level only seen a few other times in its history – Black Monday in October 1987, the Global Financial Crisis in 2008, and the covid-19 pandemic in 2020.
Now, we can add the unwinding of the Japanese Yen carry trade to that short list. For a detailed explanation of the Japanese Yen carry trade, here is Barron’s and CNBC to explain.
This means the VIX briefly exploded higher by more than +500% from its July 2024 lows.
Warren Buffett cuts Berkshire stake in Apple by half
Warren Buffett raised the cash position of Berkshire Hathaway to a record $277 billion as he sold nearly half its stake in Apple over the course of the 2nd quarter. Prior to the recent divestitures, Apple represented nearly half the public equity holdings of Berkshire Hathaway.
The conglomerate has been a net seller of stocks for seven straight quarters, but that accelerated during the second quarter with it selling more than $75 billion in equities in Q2.
The buildup of cash has some investors a bit spooked.
While most likely a risk management decision – Apple’s slowing sales of late and its elevated valuation on one side, position sizing within Berkshire’s portfolio on the other side – some are worried the excessive cash pile that has been slowly building reflects a lack of asymmetric opportunities present in the market to entice Berkshire Hathaway to deploy its cash into new opportunities.
Cash and equivalents now account for ~25% of Berkshire’s total assets, which is substantially higher than the 13% average since 1997 and approaching its most recent high in June 2005.
Market Update
Investors entered the week concerned about the validity of their economic assumptions. Friday’s monthly jobs report came in surprisingly weak with unemployment ticking upward enough that a widely-followed recession indicator triggered. The creator of that indicator tried to dampen the importance of the trigger. Nonetheless, investors were on edge. Creating further concern was a weekend report showing that Warren Buffett’s Berkshire Hathaway had cut their Apple holdings in half. This report played into fears that the powerful Mag 7 trade might be over. Investors awoke Monday morning to a Japanese stock market under siege. Investors were responding to the recent interest rate hike by the Bank of Japan. That hike, combined with expected interest rate cuts in the U.S. pushed the Japanese Yen sharply higher causing investors who were borrowing money in Yen to suddenly see their profit margin hit and calls for more loan collateral spike. The Japanese stock market plunged -12%, its worst day since the 1987 crash. That led U.S. stock futures to losses of 3-5% at Monday’s market open. The VIX indicator of market volatility soared in its 4th largest one-day move ever. Unnerved investors tried to make sense of it all. U.S. indexes ultimately closed Monday having held their losses to -3%. Tuesday saw a near complete reversal in the Japan market’s fortunes. The Japanese index recouped almost all of their prior day losses; and Wall Street followed suit with a +1% rebound. An attempt to push that rebound Wednesday met with selling as early stock gains evaporated by day’s end to leave the indexes down -1%. A report on unemployment claims Thursday showed fewer claims than expected thus easing the recessionary concerns. Buyers got more confident and pushed the S&P 500 index up +2%. Markets took a relative breather Friday with volatility back closer to normal levels and stocks ticking higher little-by-little en route to a +0.4% gain to cap a hair-raising week.
A storm hit markets early this week but was largely gone by Friday. Whether the calm seas are truly back or just a break before the next storm remains to be seen, of course. The S&P 500 fought all the way back from a dismal start to close the week flat with a +0.02% change. The Nasdaq 100 (QQQ) lost its 50-week moving average for the first time in 18 months Monday, only to recover to a weekly GAIN of +0.37% to keep its longer-term uptrend intact. The Russell 2000 small-cap index could not fully recover leaving the index off -1.21%.
Warm wishes and until next week.