Stock markets worldwide plunged Monday after investors spent an anxious weekend fretting over jobs data in the U.S. showing unemployment was worse than expected, and investors aren’t meeting the moment with much enthusiasm about bargain prices yet.
The S&P 500 Index’s 3% drop marked its worst day since September 2022 and a continuation of a steep three-day slump, but the index’s 8.5% fall from its all-time high three weeks ago has wiped out just the last three months of gains. Stocks are still up 8.7% on the year so far. That means most investors’ brokerage accounts aren’t hurting much yet, but it also means the risks market pundits have been fretting about for much of this year’s bull market are still ever-present.
“The market is waking up to the recognition that there’s a three-way problem on Wall Street,” says Jim Stack, founder and president of Whitefish, Montana’s InvesTech Research. “That problem is that it’s overvalued, it’s over-invested and it’s over-complacent.”
Stack points to data on valuation indicators like market cap to GDP and price-to-earnings multiples that remain higher than historical averages, households already having a higher percentage of their assets invested in stocks than normal, and trust is wavering over whether the Federal Reserve can continue to steer the economy into a soft landing.
That trouble below the surface set the table for Friday morning’s jobs report from the Bureau of Labor Statistics pegging the unemployment rate at 4.3%. Economists forecasted a lower rate of 4.1%, and the figure has grown from 3.7% since the start of the year. That triggered the so-called “Sahm Rule,” which observes that if the three-month average unemployment rate is at least 0.5 percentage points higher than the 12-month low in that statistic, it typically signals a recession.
Deep trouble arrived in overseas markets on Sunday evening in the U.S., with Japan’s Nikkei 225 index plunging 12% on its Monday of trading, and the S&P 500 opened down more than 4% on Monday, though the drop never snowballed into a more severe Black Monday.
“Because it happened late in the week, then you have the weekend for investors to get all worked up and put in sell orders over the weekend, and that's why the market tanked when it did today,” says Sam Stovall, chief investment strategist at CFRA. “But it's just another reminder of the old adage, never sell on a Monday.”
Stovall isn’t panicking and cites other encouraging indicators like a report Monday morning that economic activity in the services sector expanded in July, but still says he’s “not brave enough to want to buy today,” viewing it as more of a time to stand pat and see what comes next.
“We probably would need to see the S&P go to between 5,100 and 4,900 before I really feel as if we've done enough penance and that we have reset the dials,” he says—the index finished the day at 5,186, and falling to 5,000 would represent a modest drop of another 3.6%. “ However, I don't think we're headed for a bear market. I do think that this market will be a good buy shortly.”
Stack is also keeping 42% of his model fund portfolio laid out in his monthly newsletter in short-term Treasurys or a money-market fund and says the cash “isn’t burning a hole in our pocket.” Indeed, Warren Buffett is also sitting on the sidelines with Berkshire Hathaway’s record $277 billion cash pile, revealing in its quarterly earnings report on Saturday that it sold almost half of its shares in Apple in the second quarter and cut its stake in Bank of America.
Marshfield Associates, which manages $7.1 billion in assets and has beat the market with its Marshfield Concentrated Opportunity Fund returning 16.6% annually since inception in December 2015, is also keeping its powder dry. The fund is picky with its portfolio of 16 stocks and now has 25% of its assets in cash that it’s still waiting to deploy. That cash position, plus its avoidance of frothy tech stocks in favor of less volatile industries like insurance, have helped the fund hold up well for the last month, off just 2.7% from its highs.
“The cash position isn’t there as a cushion, it’s there to buy something someday—we just haven’t gotten to that someday yet,” says Chris Niemczewski, Marshfield’s managing principal. “To us, it just seems less expensive than it was before, but it’s not inexpensive.”
Investors in mega-cap tech stocks have had a more painful few weeks than others, though most of them started with a larger pile. Apple opened down 10% but recovered some of those losses quickly to end the day down 5%, and its “Magnificent Seven” peers like Nvidia, Microsoft and Amazon traded similarly. Those stocks’ standout years were the primary catalysts’ for the market’s record highs through July, and despite their drawdowns in the last three weeks, they’ve still outperformed over a longer timeframe. Nvidia, for example, has more than doubled this year, even after a 25% drop since July 10.
Investors enjoying interest rates upwards of 5% in money-market accounts likely won’t be able to maintain that virtually risk-free yield for much longer. The Fed is widely expected to begin cutting interest rates at its September meeting, concluding a two-year rate tightening cycle to tame inflation, and could even consider an emergency rate cut if conditions worsen in August. The anticipated easing is part of what has lifted stocks this year, and lower rates on cash accounts could move more capital into stocks, but the Fed has a delicate task ahead of lowering rates without spooking investors into more of a panic.
“A soft landing is not assured, and if it is a hard landing, it could turn out to be harder than anticipated,” says Stack, who remains bearish on the rest of the year. “I think there is an unwinding of the complacency and confidence that is going to progress further and take the market lower than and possibly significantly lower than investors think.”
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