The thrashing continued into the end of last week. But why did the market fall?
Is it because of geopolitical risk? Is it because of interest rates? Is it because of bad earnings? Are investors sick of stocks? What does is mean for the future? The mind is obsessed with questions. Everyone works themselves up into a frenzy trying to figure out why and how long.
This reminded me of Viktor Frankl’s book: Man’s Search for Meaning. The book explores man’s will to survive as tested in the suffering of Auschwitz, Dachau and other Nazi camps. Viktor was a hugely successful psychologist in Vienna before living through the Holocaust.
Frankl introduced logotheraphy. Logotherapists believe that illnesses, mental or otherwise, disguised existential angst as we struggled in an "existential vacuum." For their healthy mind and soul, people are driven to find meaning and reduce their feelings of angst. The urge for meaning is deep, tied to life and survival itself.
“If there is a meaning in life at all, then there must be a meaning in suffering. Suffering is an eradicable part of life, even as fate and death. Without suffering and death, human life cannot be complete.” - Viktor Frankl
For investors, this search for meaning is an obsession when the market shakes and investors look to resolve feelings of angst. We all feel a little better if we could all “know” what is going on. Even if our portfolios are dropping at least we think we know what is going on.
But at a broad level we have to get comfortable that no one really knows what exactly moves the market how much and why. Especially on a week to week basis. At best we can get clues. But rarely are they enough to make short term decisions except for a few rarefied individuals or unique instances.
What it also means is the headlines will never stop flashing to fill our insatiable drive to understand what this all means. What we have to understand is this innate line of thinking is not helpful to decision making. We will never really know exactly what is going on and why. The economy is as complex as the universe. The line of thinking becomes harmful if we decide to act on every tidbit of meaning we think might have come across.
With that said we can watch the market to see general trends that are emerging or building over time. And some trends started to sprout last week. We will watch over the next week or two to see what takes hold.
Last Week
TLDR: Momentum and growth names generally were slaughtered. Why? No certain answer. Earnings from financials and energy names show the economy is strong and consumers continue to spend/move/play.
The market looks inclined to rid itself of junk and hype as investors flush away their speculative dreams post Powell’s prepared comments last Tuesday. Powell said
The recent data have clearly not given us greater confidence…right now, given the strength of the labor market and progress on inflation so far, it’s appropriate to allow restrictive policy further time to work.
Read my lips: NO MORE RATE CUTS.
The fed funds futures (essentially investors’ bet) is now pricing cuts no earlier than Sept (but given the strength of the economy the chance even 1 rate cut in 2024 is slim):
The IPO ETF and ARK ETF approached lows for the year and seem saved today. These ETFs are full of companies that are making no money before COVID and are still making no money.
Joining the speculative dump is the momentum/growth names. Results or behaviors that were less than stellar were met with heavy selling across semis, software, and consumer discretionary (the current market leaders).
ASML: Sales and profits fell. The semiconductor industry doesn’t need its fabrication machines (which make chips) as much as expected (decline of 4% in machine orders). Down 12% post earnings. ⚠️
TSM: TSM is the world's largest contract semiconductor manufacturer. TSM cut growth forecasts from over 10% to just 10%. This does not sit well with the massive growth priced into valuations. Down -10% post earnings. ⚠️
Salesforce: The market did not like the proposed acquisition of Informatica. Down -8%. ⚠️ (this acquisition was cancelled on Monday but the stock is still down)
Netflix: Netflix decided that they would no longer report subscribers. Lack of transparency resulted in a -9% drop. ⚠️
It has been a tale of two markets the last week as value sectors rose. Think brick and mortar and real world. Financials, energy, healthcare, and staples were all up on Friday. Some missed earnings but unlike the names above, investors did not dump them. Here are some names showing amazing strength (for full disclosure I am considering picking up anything with a ⭐)
Fifth Third Bancorp: Profit and net income beat analyst projections. Up +5% post earnings.
Schwab: Client assets hit a record. Deposit growth is up and costly borrowings are down. Up 4%+ for the week. ⭐
American Express: People can’t stop spending and AmEx is the beneficiary. Up 6%+ for the week. ⭐
Kinder Morgan: Beat on earnings but missed on revenue. Pipelines and terminals driving profit. Up 6% after earnings. ⭐
United Healthcare: Paying out more in insurance medical claims which everyone expected. The stock is up 14% post earnings for the week.
Johnson & Johnson: Slightly missed earnings but raised dividends. Up about 2% post earnings.
Procter & Gamble: Lackluster growth but ends nearly unchanged for the week.
Here is a view of the behavior through fundamental factors. Factors are measure of behavioral tendencies or investing preferences. Momentum ETFs invests in stocks that keep on going up. Growth ETFs invest in stocks with growing earnings. The chart tracks the relative value of factor ETFs in excess of the market.
ETFs up at the end of the week: Minimum volatility (MTUM), Yield (VYM), Value (IWD), Small Cap (IJR)
ETFs down at the end of the week: Growth (IWF), Momentum (MTUM)
Where to next?
TLDR: Sell-offs are normal. A 5.5% decline in the S&P is “normal”. Does the correction turn into a 10% drop?
Corrections happen often and this sell-off has just started. Any bad news in earnings is getting sold. After one of the steepest climbs in recent years, the market was due for a breather.
We might have a way down. Average pullbacks on the S&P are 12.5%. We are less than halfway there with a decline of -5.5% from the high.
But take heart. Even in a bull market where the market ends higher, declines of 5% happen at least 3 times and a decline of 10% happens once a year.
Ed Yardeni suggested the SPY hitting 470 which is another 5% down. Seems like a “reasonable” place as this is the high of last year. If it does drop this much, we might have new market leadership around the “real” economy and value. If not, this year’s leaders might resume uptrends IF earnings support higher valuations.
Earnings this week will tell us what the market values most as 60% of SP 500 names are reporting. Spending is keeping the economy strong. Visa and Mastercard will give us insight on the consumer.
Pay attention for the evolution of new market leaders.
₿ A quick note about Bitcoin. The much heralded halving passed this weekend. The event matters less than the response. A drop was widely anticipated. Bitcoin did not fall and has stabilized. Maybe it rallies in the short term (the thesis for making a long term decision is too lengthy to drop here for now).
Crypto stocks like Coinbase and Microstrategy may provide good entries. On the other hand if the market sneezes for any reason, these could drop just as easily. Choose carefully.
If you have any questions, leave a comment. Thanks for reading Embrace the Chaos! Sharing perspective that makes sense.
Much effort and research went into making this 15-minute read. If you found it valuable, please help me out by clicking the like button ❤️ and sharing this article.
- Vikas Kalra, CFA
Thanks for reading Embrace The Chaos!
Great perspective Vikas. Well framed.