It’s not often you get the kind of violent, concentrated two-way turbulence that we experienced last week. In the course of three days, the S&P 500 had both its worst day since 2020 and its best day since 2022 and still ended the week unchanged.
The ferocious global market rout from the end of the prior week intensified on Monday as more storm clouds rapidly gathered over financial markets around the world. All hell broke loose in Asia where Japanese stocks got smashed by over 12%, suffering their worst day since Black Monday in 1987 and European markets rolled over.
It was likewise a bloodbath for risk assets over here once the U.S. came online, with the Big Tech/AI darlings and crypto in particular in the eye of the storm and getting ruined as large institutional market participants with huge, leveraged positions in these type of assets were forced by market conditions to unwind them all in short order, creating a vicious feedback loop.
After what was the worst trading session for U.S. stocks since the early COVID panic of March 2020, indexes closed off their lows of the day, but with no immediate signs of any kind of circuit breaker as we are currently in the midst of a “mini dead zone” for economic data releases.
The bloodied baton was passed back to Asia and a chunk of Monday’s wreckage was immediately repaired, with Japanese stocks jumping over 10% (their best day since 2008). Europe didn’t exactly rebound, but at least managed to stop the worst of the bleeding.
Some semblance of order and calm returned to U.S. stock markets after the opening bell on Tuesday as investors began to cautiously sniff around for bargains after the massive selloff. The storm clouds retreated further as the sense slowly grew that (shocker!) markets may have possibly over-reacted to an admittedly underwhelming but hardly godawful Jobs Report the Friday before and the indexes finished the session nicely higher, clawing back around a third of Monday’s losses.
The Asian and European recovery continued on Wednesday and initially followed through into the U.S. as the Fed continued to wheel out officials to vigorously push back against the narrative that the central bank has been caught offside and is losing control of the economy.
However, stocks failed to hold on to the impressive early gains as a broad-based wave of selling resumed after lunch and the indexes finished lower on the day, underscoring the market’s continued fragility.
Asia and Europe slid a touch lower on Thursday but U.S. markets benefited from lower-than-expected weekly jobless claims and the continued sense that Monday’s carnage was maybe just a fever dream and that the reality police had perhaps arrived. Stocks raced higher from the start, led by rapidly recovering tech names. The rally gathered pace as the session wore on, helped by more decent earnings reports including from the Magnificent Seven wannabe, Eli Lilly. The S&P 500 ended up having its best day since November 2022.
A schizophrenic week came to a close on Friday after mostly positive Asian and European sessions fed into the U.S. markets which paused for breath and drifted a tad higher in a rather exhausted, super-light volume session ahead of an economic data-heavy week (see THIS WEEK’S UPCOMING CALENDAR below). Astonishingly given the extent of Monday’s massacre, the S&P 500 finished Friday exactly where it had been a week before.
It’s really, really important to note that these sharp, brutal declines we’ve seen in the last couple of weeks are far more a result of the investor complacency about a sudden economic shock and resulting highly-leveraged over-optimistic positioning that I have been banging on about for months now and NOT (yet) about a significant deterioration in economic data.
Many big tech stocks and particularly in AI and crypto world have rocketed upwards in the last year mostly on a vibe and a sugar high rather than on any kind of commercial reality.
Now financial markets have finally been forced to admit what was frankly obvious to anyone who had been paying attention; that the fully priced-in absolute perfection of never-ending economic growth, continually explosive earnings, guaranteed AI riches for all and relatively tranquil geopolitics does not exactly correspond to what we are experiencing right now.
That disconnect is starting to be corrected by these violent mini-crashes and subsequent rebuilds and that’s a good thing in the long term as it solidifies the foundation of future stock price rallies and increases the likelihood that they could be sustainable and long-lasting.
One last thing. To be clear, heavily falling markets are a feature of investing for your future, not a bug. They are going to happen frequently over your investing timeline. For those with longer time horizons (ten, fifteen or twenty years or multiple decades) these moves provide delicious opportunities to buy equities through ETFs at lowered prices and this weekly report is absolutely not intended to shake such investors out of their stock positions. Quite the opposite.
Stock markets have never, ever failed to subsequently rally back to new all-time highs following any steep declines. There’s no reason to think that’s ever going to change. Just keep buying for the longer term.
OTHER NEWS ..
Vacation Woes .. Airbnb Inc. shares plunged after the company issued yet another disappointing outlook and warned of slowing demand from U.S. vacationers. The company is “seeing shorter booking lead times globally and some signs of slowing demand from U.S. guests.”
At the same time, shares of Booking Holdings also got hit, with “moderation” in the European travel market and U.S. consumers opting for lower-star hotels and much shorter stays being blamed.
Moving Out .. The pandemic changed where Americans are likely to live and work, with a growing portion of job openings moving away from the biggest cities and into smaller metro areas, according to a Federal Reserve Bank of New York analysis.
Job listings in large central metro areas now account for about 38% of total listings nationwide, down from 46% pre-pandemic. The portion of job openings in smaller metros increased and the share of openings in “fringe” metros outside of large central cities held steady, the study showed. Increased remote work led to a decline in the share of jobs concentrated in major cities that require people to commute into an office. As people relocated to the smaller urban centers, it created more demand for food workers, health care and other services in those areas.
Pancake Money .. Wealthier Americans are visiting IHOP and Applebee’s more often and they’re looking for deals on their pancakes and wings. Dine Brands Global Inc., the two chains’ parent company, announced a drop in visits from lower-income customers in recent quarters but is attracting more guests from households that make $100k+ annually. All diners, regardless of how much they make, are gravitating to value offerings including unlimited riblets at Applebee’s and a special breakfast combo deal at IHOP.
ARTICLE OF THE WEEK .. Bumper triple issue.
Steep declines like we have seen recently can generate a multitude of tempting reasons to sell your stocks. Here’s why every single one of them is wrong.
A trillion dollar time bomb is ticking in the housing market.
Insurance companies are quite literally trying to steal your retirement money.
THIS WEEK’S UPCOMING CALENDAR ..
For those who nerd out on Federal Reserve policy, this week's highlight will be new inflation data. Q2 earnings season begins to wind down.
The latest Consumer Price Index (CPI) measure of retail inflation will be released on Wednesday morning. The consensus estimate is for +2.9% from a year ago. The day before, we will get to see the Producer Price Index (PPI) measure of wholesale inflation experienced by manufacturers
On Thursday we will get the important latest Retail Sales data and the big Consumer Sentiment Survey comes out on Friday.
Earnings reports to watch will come from Walmart, Home Depot, Alibaba, Cisco, AMD, Deere and Barrick Gold.
LAST WEEK BY THE NUMBERS ..
Last week’s market color courtesy of finviz.com
Last week’s best performing U.S. sector: Industrials (two biggest holdings: GE Aerospace, Caterpillar) - up 1.3% for the week.
Last week’s worst performing U.S. sector: Materials (two biggest holdings: Linde, Sherwin Williams) - down 1.6% for the week.
SPY, the S&P 500 Large Cap ETF, tracks the S&P 500 index, made up of 500 stocks from among the largest U.S. companies. Its price was unchanged last week, is up 12.1% so far this year and ended the week 5.6% below its all-time record closing high (07/16/2024).
IWM, the Russell 2000 Small Cap ETF, tracks the Russell 2000 index, made up of the bottom two-thirds in terms of company size of a group made up from among 3,000 largest U.S. stocks. Its price fell 1.2% last week, is up 2.9% so far this year and ended the week 14.9% below its all-time record closing high (11/08/2021).
AVERAGE 30-YEAR FIXED MORTGAGE RATE ..
6.47%
One week ago: 6.73%, one month ago: 6.89%, one year ago: 6.96%
Data courtesy of: FRED Economic Data, St. Louis Fed as of last Thursday.
FEAR & GREED INDEX ..
“Be fearful when others are greedy and be greedy when others are fearful.” Warren Buffet.
The Fear & Greed Index from CNN Business can be used as an attempt to gauge whether or not stocks are fairly priced and to determine the mood of the market. It is a compilation of seven of the most important indicators that measure different aspects of stock market behavior. They are: market momentum, stock price strength, stock price breadth, put and call option ratio, junk bond demand, market volatility and safe haven demand.
Extreme Fear readings can lead to potential opportunities as investors may have driven prices “too low” from a possibly excessive risk-off negative sentiment.
Extreme Greed readings can be associated with possibly too-frothy prices and a sense of “FOMO” with investors chasing rallies in an excessively risk-on environment . This overcrowded positioning leaves the market potentially vulnerable to a sharp downward reversal at some point.
A “sweet spot” is considered to be in the lower-to-mid “Greed” zone.
Data courtesy of CNN Business as of Friday’s market close.
FEDWATCH INTEREST RATE TOOL ..
Will interest rates be lower than they are now after the Fed’s next meeting on September 18th?
Yes .. 100% probability (100% a week ago)
No .. 0% probability (0% a week ago)
Where is the Fed Funds interest rate most likely to be at the end of 2024?
4.375% (1.00% lower than where we are now, implying four 0.25% rate cuts before the end of 2024)
One week ago: 4.125% (implying five rate cuts), one month ago: 4.875% (implying two rate cuts)
All data based on the Fed Funds rate (currently 5.375%). Calculated from Federal Funds futures prices as of the market close on Friday. Data courtesy of CME FedWatch Tool.
% OF S&P 500 STOCKS TRADING ABOVE THEIR 50-DAY MOVING AVERAGE:
58% (290 of the S&P 500 stocks ended last week above their 50D MA and 210 were below)
One week ago: 56%, one month ago: 44%, one year ago: 57%
% OF S&P 500 STOCKS TRADING ABOVE THEIR 200-DAY MOVING AVERAGE:
66% (332 of the S&P 500 stocks ended last week above their 200D MA and 168 were below)
One week ago: 69%, one month ago: 63%, one year ago: 62%
Closely-watched measures of market breadth and participation, providing a real-time look at how many of the S&P 500 index stocks are trending higher or lower, as defined by whether the stock price is above or below their more sensitive 50-day (short term) and less sensitive 200-day (long term) moving averages which are among the most widely-followed of all stock market technical indicators.
The higher the reading, the better the deemed health of the overall market trend, with 50% considered to be a key pivot point. Readings above 90% or below 15% are extremely rare.
WEEKLY US INVESTOR SENTIMENT (outlook for the upcoming 6 months) ..
↑Bullish: 41% (45% a week ago)
⬌ Neutral: 22% (30% a week ago)
↓Bearish: 37% (25% a week ago)
Net Bull-Bear spread: ↑Bullish by 4 (Bullish by 20 a week ago)
For context: Long term averages: Bullish: 38% — Neutral: 32% — Bearish: 30% — Net Bull-Bear spread: Bullish by 8
Survey participants are typically polled during the first half of the week.
Data courtesy of: American Association of Individual Investors (AAII).
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