Market Sell-Off – August 5, 2024

Global markets are down sharply again this morning, with the S&P 500 currently trading off roughly 8% from its recent highs. Reasons for the sell-off:

• A sharp unwind of the Tech-driven Momentum trade. From JPMorgan¹: “Momentum is a dynamic stock factor that changes its exposure depending on macroeconomic and fundamental conditions. As such, it often becomes crowded, followed by an inevitable and often sharp correction…This extreme Momentum crowding is due to sharp outperformance of right tail momentum, very narrow leadership in mega-caps, and investors insatiable demand for sustainable growth stocks in a challenging macro backdrop. This extreme level of crowding was last seen at the peak of [2000] TMT Bubble.” The MTUM ETF (+14% YTD thru Friday) is currently 34% Technology with NVDA and AVGO its largest positions. This is what has driven the market and as JPMorgan and others have noted, Momentum is a factor that typically takes the escalator up and the elevator down. Just as Momentum investors indiscriminately buy on the way up (buying solely based on recent price movement rather than fundamentals), they will indiscriminately sell on the way down. A couple pieces of news fueling the Tech unwind:
  • Nvidia’s next-generation Blackwell GPU computer chips have design flaws, though the product is still expected to ship after a roughly 3-month delay ²
  • Berkshire Hathaway (Warren Buffett) sold over half of its massive Apple position in Q2, though it remains the largest non-ETF owner ³
  • Weaker than expected (though still solid) earnings reports last week from numerous Tech giants including Amazon and Microsoft
• In addition to the correction in the Momentum factor, traders have also been rapidly unwinding the “carry trade” of borrowing at low interest rates using Japanese Yen to fund global purchases in other currencies like the US Dollar ⁴
• There are renewed US recession worries following the weak Manufacturing ISM report on Thursday and Nonfarm Payrolls report on Friday
• The manufacturing report has been weak for months, though it did dip further in July ⁵
• The jobs report may not have been as bad as it seemed: Hurricane Beryl’s impact and a spike in temporary layoffs should be one-time issues and the unemployment rate spiked mainly due to more prime-age workers reentering the labor force ⁶
• This string of weak datapoints has prompted talk that the US Federal Reserve is “behind the curve” in being too late to cut rates. Markets now expect a 50bp rate cut at the September Fed meeting ⁷
• This morning, the US Services ISM report came in better than expected, meaning that the economy overall could remain in good shape despite continued weakness in manufacturing ⁸
• Worries of a wider conflict in the Middle East following events from last week ⁹
• Stock market valuations are still elevated relative to history, meaning there can be a further drop in the markets before we can expect a significant amount of cheap valuation-induced buying

Overall, we think the recent sell-off is driven more by technical (trading/positioning) factors than any significant shift in fundamental news. We recognize that even technical sell-offs can be significant and that the fundamental news could worsen over the coming days, but given what we know today, we do not expect a substantial, lasting decline. We thus urge clients to remain calm and stay the course, keeping a long-term focus and maintaining their target risk levels.

Please reach out to your GGS advisor if you have any further questions or concerns.