Global equities sold off on Friday and U.S. Treasury yields were at multi-month lows on concerns about the economy and downbeat forecasts from Amazon and Intel, which hit richly-valued technology firms.
The Nasdaq Composite index was recently down 2.3%, putting it on track to confirm it is in a correction following worries about pricey Big Tech valuations and as weak employment numbers aggravated worries of a slowdown.
A survey of reaction from the Street:
ART HOGAN, MARKET STRATEGIST, B. RILEY WEALTH:
“This isn’t a category 3 hurricane, but we are seeing how markets react to signs that the economy is normalizing after turning hot in the first half of this year. The path to normalization is never going to be smooth, and we’re just not used to what ‘normalization’ feels like. Markets can find themselves overreacting and investors glom on to anything as an excuse to take profits.”
Tech stocks “led the way up and valuations got stretched. The good news is that though Nvidia may be down 30% or so from peak to trough, the S&P 500 is only down a fraction of that amount. There’s a rotation as well as a selloff.”
MICHAEL ARONE, CHIEF INVESTMENT STRATEGIST, STATE STREET GLOBAL ADVISORS, BOSTON
“There are three thing driving this selloff. August is notoriously a difficult month for markets, and we went into it with markets priced for perfection, particularly the Magnificent 7 stocks. Even beating expectations on both the top and bottom lines wasn’t enough this quarter, at these valuations.”
“Ultimately, cooler heads will prevail. Corrections are normal, and this is a garden variety correction. For it to wane we’ll need continued good earnings growth and some economic data that stops the tide of recession fears. If you can get some of that, this correction will begin to wane.”
“It’s important to keep an eye on credit spreads moving forward. That will be an important barometer for the economy and how people feel about business risk. They have widened significantly, but they’re not blowing out in the way that they would if there was something underlying wrong.”
MATT ROWE, HEAD OF PORTFOLIO MANAGEMENT AND CROSS ASSET STRATEGIES, NOMURA CAPITAL MANAGEMENT, NEW YORK
“In summary, the jobs report is being treated as an inflection point. Today, the bad news is being treated as ‘bad news’. Prior to today, bad economic data was treated as a positive as it increased the likelihood of a rate cut and that fueled equity beta appreciation.”
DAVID WAGNER, HEAD OF EQUITIES & PORTFOLIO MANAGER, APTUS CAPITAL ADVISORS, OHIO
“It all comes down to growth and what we’ve witnessed over the past two days is a continued trend in lower manufacturing PMIs and a weaker-than-expected jobs report that could call into question that the lagging effects of monetary policy are really starting to form and that the Fed may need to become more reactionary than proactive. "
BRIAN MULBERRY, CLIENT PORTFOLIO MANAGER, ZACKS INVESTMENT MANAGEMENT, CHICAGO
“The only clear definable trend is the softening labor market leading to a decline in manufacturing leading to weaker than expected forecasts as Q2 earnings come out…With so much return attributed to so few stocks, this kind of volatility was very probable. We have also seen the broader market lower forward guidance under the high cost of capital and believed it was only a matter of time before it happened to the Mag 7 stocks too. This week’s earnings have shown that several of them are not growing as fast as anticipated.”
“There is a silver lining here. With yields now pulling back below 4%, they are traveling down to a much more competitive level with our long-term Dividend yield of 3.4%. Remember there is still $5 Trillion in money market accounts that could be looking for better treatment if the Fed does cut rates.”
MATT LLOYD, CHIEF INVESTMENT STRATEGIST AT ADVISORS ASSET MANAGEMENT
“What’s happening today is the realization that there are undercurrents, whether it’s the job market or consumer sentiment or the election volatility, that could be changing the reason why the Fed is cutting from inflation to a weakening economy.”
“You’re seeing decent earnings but the revenue numbers are not robust. You’ve had high retail allocations into equities and you’re getting a shakeout that will churn here for a while.”
MARK TRAVIS, PORTFOLIO MANAGER, INTREPID CAPITAL
“This market has been heavily concentrated and people are realizing now that they did not have the valuation support to keep buying at those levels.”
“People are starting to reassess what their risks are and whether they are properly positioned.”
TOM PLUMB, CHIEF EXECUTIVE AND PORTFOLIO MANAGER AT PLUMB FUNDS, MADISON, WI:
“This is an old fashioned correction going on and it’s obviously not something that anyone anticipates the moment it starts, or even when it’s going (to) end, but it’s just not that unusual as we passed the economic torch from the perception of growth to the perception of needing government intervention with lower interest rates to stabilize the economy.
“As we go through the fall and we start to see some impact of the Federal Reserve taking actions (in terms of rate cuts), we can see a recovery from the 16,600 levels right now to well over 18,000 by the end of the year.”
CLAUDIA SAHM, CHIEF ECONOMIST AT NEW CENTURY ADVISORS AND FORMER FED ECONOMIST, ARLINGTON, VIRGINIA:
“The Fed, because it hasn’t started to normalize yet, has a lot of room to step in and take some pressure off the economy. This is not a crisis moment. We still have a strong economy, it’s just slowing in a way that needs to get under control. Given that (the Fed) has been slow to start their interest rate reductions, doing some catch up in September could make a lot of sense. They’re going to want to be – appropriately so - deliberate in their actions.
“We don’t need a Federal Reserve that is in crisis mode. We’re not in a crisis, just... action needs to be taken... And I think that’s what will happen. It’s exactly how they will calibrate it will be a question. It’s unfortunate that September feels a long way away right now.”
YUNG-YU MA, CHIEF INVESTMENT OFFICER, BMO WEALTH MANAGEMENT (IN A NOTE):
“A 50 basis point Fed cut in September is clearly justified as the labor market is now showing clear signs of softening. The Fed is already falling behind the curve and rates are overly restrictive – a 50 basis point cut in September would only be catching-up to, rather than getting ahead of, the curve.”
SOLITA MARCELLI, CHIEF INVESTMENT OFFICER AMERICAS, UBS GLOBAL WEALTH MANAGEMENT (IN A NOTE):
“US equity markets had been enjoying an unusually smooth rally until the middle of July. The S&P 500 had gone more than 350 trading sessions without a drop of more than 2%—the best run in 17 years. A return to higher levels of volatility was to be expected, especially as the Fed approaches the start of a cutting cycle and as investors await guidance from top tech firms on whether their heavy investments in AI are paying off. Meanwhile, political uncertainty remains elevated, especially ahead of the US presidential election in November.”
CHRIS BEAUCHAMP, CHIEF MARKET ANALYST AT ONLINE TRADING PLATFORM IG (IN A NOTE):
“In the space of barely two days markets have gone from looking forward to a Fed rate cut in a growing economy to fretting about an impending recession. Today’s huge payrolls miss and the surge in the US unemployment rate has sparked a fresh flight from risk assets already reeling from some poor earnings reports and concerns about a wider conflict in the Middle East. Investors are now hoping for a 50bps rate cut in September, but worry that even this will be too little, too late to stave off a US recession.”
MICHAEL PURVES, CEO, TALLBACKEN CAPITAL ADVISORS, NY
“This is a good excuse for investors to sell after a huge year to date rally. Does this weaker jobs number portend a recession that’s coming two quarters from now? There’s a lot of conflicting data.”
“Investors should be prepared for some major volatility, particularly in the big tech stocks. But it will probably be short-lived. The earnings reports haven’t been blockbuster, but they haven’t been bad either.”