Market Reacts to Jobs Report and Tech Earnings, Buffett Adjusts Apple Position

What Happened:

The stock market had experienced a very strong run this year, with the S&P 500 making 31 “new highs” from January to June. As of July 31, the S&P 500 had returned 16.7% YTD, and valuations had become stretched as expectations were high.

On Friday, investors were caught off guard as the Bureau of Labor Statistics published their monthly jobs report. Job growth came in much weaker than expected, adding only 114k jobs in July, leading to a 4.3% unemployment rate. While this is not high by historical standards, it was significantly below market expectations, stoking investor fears of a looming recession. The softer jobs report came on the heels of disappointing earnings from some of the big tech giants. Investors have become increasingly anxious about the significant capital investments required to pursue Artificial Intelligence and the uncertainty surrounding a future reward. Given the impact that the Magnificent 7 has had on the market rally so far for 2024, these mixed earnings results have added to market volatility.

Adding to the chaos, it was reported that Warren Buffett and Berkshire Hathaway reduced their position in Apple by nearly 50%.

On Monday, the selloff continued. Japan’s Nikkei Index plunged 12.4% overnight, while the NASDAQ was down over 5% pre-market. Additionally, the CBOE Volatility Index (VIX, aka “Fear Index”) exploded higher to 65x this morning. This is an extreme move and the largest since March 2020 during the COVID-19 pandemic. Cryptocurrencies were not immune, with Bitcoin dropping over 20%, briefly dipping below $50,000 as the sell-off hit all risk assets.

CAISSA Perspective:

We believe a pullback was justified and is healthy for the overall market in the long term to avoid bubbles. Pullbacks like this have historically been quite common. Despite producing positive returns in 33 of the past 44 years, the S&P 500 has averaged an intra-year decline of 14.2% since 1980.

While we are not ruling out the possibility of additional downside, in our opinion, some of the sell-offs we saw early this morning may be an overreaction, and this has not materially changed our long-term view of stocks.

The jobs report signaled a softening in the labor market, though a 4.3% unemployment rate does not seem significant enough to cause this level of alarm. In fact, given the jobs report, economists now expect the Federal Reserve to cut interest rates more aggressively in 2024 than previously anticipated. Current Fed Fund futures are pricing in 50 basis points in cuts for September and November, with another 25 basis points in December. This is a dramatic shift in interest rate expectations, and there is even chatter regarding an “Emergency Fed Rate Cut,” where the Fed would schedule an ad-hoc meeting and lower rates ahead of their scheduled September meeting. While this has become an actual possibility, right now, markets seem to be functioning fine, and we do not anticipate this being required.

It should also be noted that the same investments in A.I., which are now worrying investors, were welcomed with open arms earlier this year. In our view, it looks as though investor sentiment has shifted to a more bearish lens, choosing to focus on the here and now versus an uncertain future. A reset in tech stocks to more reasonable valuations can present an attractive entry point for bullish long-term investors.

Unlike in 2022, bonds provided their expected protection for portfolios during this bout of volatility. A “flight to quality” led to significant buying for bond investments, plunging yields lower, with the 10-year yield dropping from near 4.2% to 3.7% in just a few days.