In mid-day trading today (Friday, August 2, 2024), we are seeing a broad-based market sell-off in response to a surprisingly weak jobs report. The S&P 500 is currently down 2.3% and the NASDAQ Composite Index is down 2.7%.
Meanwhile, bonds are rallying. The yield on the 10-year Treasury is now 3.8%, which is substantially lower than the year-to-date peak of 4.7% at the end of April. Gold is essentially flat, hovering around $2,450, very close to its all-time highest levels.
Today’s trading builds on yesterday’s weakness as the market digests a number of indications of deteriorating growth. Yesterday after the close, semiconductor manufacturer Intel (INTC) announced a major earnings miss, driven in part by softening demand for personal computers. INTC shares today are down more than 25% following the company’s announcement of reduced forward guidance, a major corporate restructuring and suspension of the dividend.
Investors are grappling with the possibility that we are on the precipice of a significant macroeconomic shift. Is the Fed’s high interest rate policy finally doing enough damage to the economy that growth is not only decelerating, but we are at risk of flipping into recession?
The sell-off in stocks has not been uniform. Tech stocks are especially weak today (down approximately 3.3%), as the INTC news is absorbed and investors contemplate the impact of an economic slowdown on the ability of tech companies to achieve aggressive growth forecasts.
Meanwhile, defensive and interest rate sensitive sectors, including Consumer Staples, Real Estate and Utilities, are generally flat and in some cases positive. Within our Income Builder Model Portfolio, we note that positions representing a 35% allocation within the portfolio are in positive territory as we write. These stocks are benefiting from falling rates and a perception of earnings stability.
Potential actions
As always, we encourage a long-term view of investing based on diversified equity exposure to high quality businesses along with allocations to cash, gold-related investments and fixed income as “shock absorbers” for equity market volatility.
This week’s sell-off, while perhaps unsettling, should be seen in the context of strong year-to-date market returns, with the S&P 500 still up approximately 12%.
If we are entering a period of sustained macroeconomic softness, this could be harmful to corporate earnings, which would weigh on both cyclical and growth stocks. But such a scenario also has the potential to snuff out some of the more short-term inflationary forces within the economy and lead to interest rate cuts, which would ultimately help stock market valuations.
With the Nasdaq 100 now underperforming the S&P 500 year-to-date, investors looking to add to their growth exposure may wish to take advantage of the current volatility to build up positions. We have previously profiled Oracle (ORCL) and Texas Instruments (TXN) for 76report subscribers, both of which are participating in today’s sell-off. Our conviction around these names as long-term investments remains unchanged.
