• It is hard for me to rationalize Friday's total market collapse based on the continuing facts on the ground

• It is hard for me to believe in a market where the publication of two single data-points (Unemployment Claims coupled with a weak ISM report) can wreck havoc on prices up and down the investment food chain.

• Is anyone doing fundamental investing anymore or has the market become the private domain of day traders, algorithms and easy to enter/ easy exit ETFs?

The Facts on the ground

On Thursday, the facts on the ground were as follows: 

We were basking in the glow of a preliminary report of second quarter 2024 GDP growth a 2.8 (accelerating from 1.4% in the first quarter), personal consumption expenditures, PCE (the Fed’s preferred inflation measurement) up 2.5% over a year ago and getting closer to the 2% goal, unemployment slowly rising +4.1% and a Fed chairman acknowledging the committee was close to providing our first rate cut in one and a half years. The much forecasted recession (or worse) is nowhere to be seen … the veritable “soft landing” seeming more likely.

What a difference a day made on Friday with the Nasdaq off 2.3%, S&P 500 down 1.37%, the Dow minus 1.21% and the super-shaky/economically sensitive Russell 2000 down a whopping 3.03%. 

Over in the bond market there was what appeared to be a flight to safety (safe haven buyers pushing prices up and yields dow). “Markets wilt as growth fears slam yields.” (Reuters) The wilting referred to here is a good thing, the rate on the UST 10-year note dropped from 4.06% to 3.98%.

The data-point culprits

According the Institute for Supply Management (ISM), their purchasing manager’s index (PMI) declined in July to 46.8. That was down 1.7% from the June reading. It is the fourth consecutive decline and 20th decline in the past 21 months. Surprise, surprise … hmmm, Fed policy must be working. I wonder if this might be in part the cause of the Fed’s more dovish stance. The other unsurprising shoe to drop was the report of higher than expected unemployment claim numbers (claims to a one-year high). As we closed trading Thursday the media begins the drum beat on Friday’s employment report … if not as expected, another potential shoe to drop.

These appeared to be the triggers for today’s rout. Of course, after the runs to new all-time highs that many of the indices have enjoyed a little profit taking was in order but in one fell swoop the markets headed south with nothing being spared. Even the once bulletproof Mag Seven had a bad day.

Whatever happened to fundamental investing?

The answer is that it has been mostly displaced by sector or index trading with ETFs and algorithmic computer trading programs that have little to do with discernment and much to do with the type of headline the developers might feel would move the market … ergo, the volatility we see and the apparent mindless and panicky selling we saw Thursday.

I think Warren Buffett once said, something to the effect, ‘the only reason to keep the markets open is to see how foolish people can be.’

Move on folks. Nothing new to see here. The economy is fine but is slowing. Inflation is abating. This has been much anticipated and to be expected in light of Fed policy. Also to have been expected was the Fed’s change in tone to a more constructive view on rate cuts.

You should feel very comfortable buying mid-cap, small-cap and value. I would put a hold on Mag-7/Big Tech. I continue to feel the broader market has much further to go.

What do you think?

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