July 29, 2024
UPDATE 1 - 2 Aug 2024
Stocks fell sharply on Thursday and Friday as a much weaker-than-anticipated jobs report in the US for July (with non-farm payrolls growing by just 114k vs 175k expected) ignited fears of a slowing economy. With less jobs added, the US unemployment rate rose to the highest since October 2021 (4.3%).
You might remember that we discussed a few weeks ago about a US yield curve re-steepening (normally a sign of recession), slowing European PMIs (leading indicators of growth) and excessive euphoria in tech stocks, a sector where second-quarter earnings have been underwhelming in some cases.
Such backdrop is the perfect context for sudden market losses in the summer when markets have little liquidity.
The NASDAQ is the first of the three major benchmarks to enter correction
territory, down more than 10% from its record high. The S&P 500 and
Dow were 5.7% and 3.9% below their all-time highs, respectively. Also the Stoxx 600 is 4.9% below its all-time high. Government bonds, normally used by investors for protection, have rallied.
While we will publish a longer market blog with some detailed charts showing the recent change in key variables, for now we anticipate that these movements are normal. Such declines are a natural course in a bull market (overbought recently) that is reverting after its steep uptrend.
We see no additional signs of recession if we ignore the re-steepening of the US yield curve, justified - as we said a couple of weeks ago - by a slowing down of inflation and an expected normalization in interest rates (by the FED and ECB) for the upcoming future.
A Fed rate cut in September is getting closer.
UPDATE 2 - 26 Jul 2024
The negative sentiment around tech stocks, started on the 11th of July, have continued this past week and - given the relative size of the tech sector in mainstream stock markets - equities have moved lower overall.
The recent tech downfall is evident in the light blue line above.
Well, there are probably two ways to look at it.
Point of view number one (optimistic): this is the start of a rotation into more economically sensitive stocks as we go into soft landing, with investors just selling expensive sectors (tech) to make room for new purchases (value, midand small caps).
Point of view number two (gloomy): it is the beginning of fundamental weakness that will lead to layoffs and lower consumer spending.
While it is a bit pointless to look at the very short term, yesterday markets have bounced back on oversold sentiment and because of a benign technical inflation update from the US (PCE deflator rising only 2.5% since last year).
Such recent behavior will make a stronger case for the first point of view.
Meanwhile, fixed income investors have got a bit of oxygen with short and long duration Treasuries and European government bonds moving lower (prices higher).
