🎙️ Drumbeat of Skepticism

It’s August, peak vacation time, and we can all relax because very little is happening in markets.

😅 If only.

Global markets sold off to start the week as concerns emerged about a slowing U.S. economy after job growth slowed drastically last month. The S&P 500 registered its worst single day in two years, and big tech’s slide worsened.

Investors are worried: Will the Federal Reserve need to play catch up in cutting rates?

Today’s chart of the day offers some perspective: It shows the other 28 times since March 2009 that the S&P 500 has corrected at least 5% off an all-time high.

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the biggest stories in markets:

• Detailing the global market selloff

• Warren Buffett trims enormous Apple stake

This, and more, in just 5 minutes to read.

Chart of the Day

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In The News

📉 Breaking Down the Global Market Selloff

Woah — we all need a breather.

How quickly the tides turned. In a matter of a few weeks, the narrative on Wall Street has shifted from soft landing to all-out panic. The CBOE Volatility Index, also known as the VIX, soared to its highest close since the panic that defined March 2020.

Technology stocks led the market sharply lower on Monday, again, after continued fears of a recession following the disappointing jobs numbers in July. What also didn’t help: Investors fearful that AI hype has run its course, a Bank of Japan rate rise, and news that Warren Buffett keeps boosting his cash pile to new heights (more on Buffett below).

Overall, many of 2024’s most popular traders have been hit the worst—Nvidia is already down about 30% from its high—and investors worldwide are jumping into government bonds as they look for safe havens. Gold, for one, is now outpacing the U.S. stock market in 2024.

What a series of events: Less than a week after the Federal Reserve held short-term rates, many investors fear the central bank waited too long to start cutting.

Plus, the second-quarter earnings reports for major tech companies have generally fallen short of sky-high expectations, particularly for those heavily investing in AI. Consider:

• Microsoft and Alphabet saw their stocks decline quite sharply after reporting results that didn’t meet very high expectations.
  

• Intel had a severe 26% drop last week, its worst since 1985, thanks to poor performance in its AI and data center business.
  

• CEOs are warning about economic challenges that may not be reflected in today’s data. Take the McDonald's CEO, who recently reported a slowdown in visits from lower-income customers.

Amazon's shares fell 8.8% after projecting weaker-than-expected revenue growth.

Why it matters:

Dumbest of skepticism: “There’s now a drumbeat of skepticism about the benefits of AI and whether it will actually deliver profits and productivity at the level that’s been promoted,” said one chief investment officer in the U.S.

A sampling of two other investment officers’ perspectives from across Wall Street 

“There’s an increased perception of risk across financial markets in general, and that’s had the knock-on effect of causing macro investors to cut back their risk broadly across their books.”

Another investment officer added, “A return to higher levels of volatility was to be expected, especially as the Fed approaches the start of a cutting cycle. We suggest investors avoid overreacting to short-term shifts in market sentiment.”

The Yen carry: It’s also worth pointing out the Yen carry trade: Interest rates have been so low in Japan for so long, that a popular trade involved borrowing yen and investing those funds into U.S. tech stocks. After the Bank of Japan surprised with an interest rate hike last week, the yen jumped in value against the dollar.

That forced investors to unwind this “yen carry trade” as it’s known, by selling U.S. stocks to repay the loans borrowed in yen after incurring losses on those positions.

TLDR: The fallout from leveraged investors borrowing in Japan and unwinding their bets is one of the primary factors market observers are pointing to as stoking today’s global selloff.

The big question: The question moving forward, of course: Is the recent selloff another buy-the-dip moment in a larger bull market, or is more panic on the way?

Read more

More Headlines

🤔 Goldman: Has the AI bubble burst? ‘Too much spend, too little benefit’

🏠 U.S. pending home sales surge in June, pulling in buyers from sidelines

📉 Interest rates are already falling 

📈 Palantir raises annual revenue forecast on AI strength; shares surge

🤓 Lessons in financial economics from Seinfeld

🛢️ Oil slumps to fresh seven-month low amid global financial rout

🤯 Starter homes now cost $1 million in at least 237 U.S. cities

📱 Warren Buffett Sells Nearly 50% of Apple Stock

$277 billion.

That’s no typo — that’s how much cash Warren Buffett’s Berkshire Hathaway is sitting on after selling nearly half of its shares in Apple last quarter. The move surprises many, given Buffett’s reputation for long-term holds and his previous praise for Apple as a core holding and a “wonderful” company, calling it an “even better business” than American Express and Coca-Cola, two of his other top holdings. 

Selling spree: Of course, Buffett is also likely simply taking profit on one of the best investments of his career. He started buying shares in the iPhone maker in 2016; Apple stock has risen ~320% in the past five years and roughly 17% in the past 12 months, even when accounting for the recent selloff. 

• Buffett had already cut the Apple investment by 13% in the first quarter.
  

• During the second quarter, Berkshire sold a net $75.5 billion worth of stocks, increasing its cash reserves to a record $276.94 billion. (Now, Buffett’s investment in T-bills has eclipsed the Federal Reserve's.) The selling spree wasn't limited to Apple, either; Berkshire also reduced its stake in Bank of America, its second-largest stock position.

Breaking up with banks: Buffett isn’t much of an investor in banks anymore: Bank of America shares rallied about 75% from a low in October to when Berkshire started selling it in July.

A senior research analyst commented, “He doesn’t seem to be in love with banks. There’s been a lot of selling activity among bank holdings in recent years.” That includes JPMorgan Chase and Wells Fargo in recent years.

Despite the substantial stock sales, Berkshire Hathaway reported strong results for the second quarter. The company's operating earnings, which Buffett considers a better performance measure, rose to $11.6 billion from $10 billion a year earlier.

Why it matters:

Buffett’s reputation as the greatest investor of all time means his every move is under a microscope. 

The actions reflect Buffett's challenge in finding attractive investment opportunities in the current market. Buffett seems reluctant to deploy cash unless he sees lower-risk opportunities with better potential returns.

• “We’d love to spend it, but we won’t spend it unless we think we’re doing something that has very little risk and can make us a lot of money,” Buffett said in May.

Also of note: Berkshire spent $345 million buying back shares in the second quarter, down from $2.6 billion in the first quarter. 

That Buffett is sitting on so much cash could mean he thinks this market has few (if any) attractive investment opportunities; it also could signal that the Oracle of Omaha believes the market is widely overvalued amid AI euphoria. Both explanations could be true.

• “You could conclude this is another sell signal,” noted one analyst who covers Berkshire. “This was a far higher level of selling activity than we were expecting.”

Berkshire’s Class A shares are up 13% in 2024, outpacing the S&P 500’s 9% gain.

Read more

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Quick Poll

On Friday, we asked: At mid-summer, what do you think is in store for the U.S. stock market into year-end?

— Of course, nobody knows what the future holds, but about half of readers expect continued chop at least until the U.S. presidential election, which is in three months.

— Some respondents believe the market will bounce back once the Federal Reserve cuts interest rates. Others said the days of market calms in the first over are over. “Too complicated to summarize in a few short sentences,” one reader said.

See you next time!

That's it for today on We Study Markets!

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