Does the US stock market sell-off signal a recession, or is it just a natural adjustment?
4 August 2024, 09:45
Since the turn of the year, the focus for US equity investors has been in the world of technology and the growing influence of AI to not only this sector, but also to business development across the spectrum.
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‘The Magnificent Seven’ – Amazon, Apple, Alphabet, Microsoft, Meta, Tesla, Nvidia’ - have captured the imagination of investors – short and long-term.
This frenetic activity provided sufficient momentum to carry the S&P500 index of leading US shares to hit an all-time high valuation of $47 trillion! The flight to quality was there for all to see. The 10-year US Treasury suffered its biggest weekly fall since the start of the year.
Away from tech, activity on the ‘Street of Dreams’ has been eerily and worryingly somnolent. However, the main US indices made steady progress up to the end of June 2024, though the performance of the 30 constituent stocks in the DJIA has been sluggish.
Investors, at the same time, have kept their beady eyes on the performance of cryptocurrencies, especially Bitcoin, which has ‘bobbed about like a cork in a bath’ during the last three months - $71k in May to $57k on 7th July to $67k on 29th July to $61k on 2nd August.
In June a few sages from respected financial institutions such as Morgan Stanley and Goldman Sachs suggested that against a background of stubborn inflation and the unrealistic frothy valuation levels that many tech titans had reached, a sell-off of between 15% to 25% could not be ruled out. Many Wall Street observers scoffed at the prospect. 2nd quarter GDP had come in on an annualised basis of 2.8%, with forecasts for the 3rd quarter just dipping to 2.5%.
In the past few weeks, we have witnessed violent Wall Street rotation from Big Tech plunging the Nasdaq 100 Index into correction territory, wiping out more than $2 trillion, as traders unwound bets that had been minting money for over a year. Since early July the NASDAQ has surrendered close to 10% in value. That means it has passed the threshold that meets the definition of a correction. But it’s still up nearly 10% for the year.
I think what rattled most investors' cages was the perceived indecision of the Federal Reserve to keep rates on hold at 5%-5.25% until September, with Chairman Jay Powell having acknowledged that inflation was ‘coming back on the bridle.’ Shortly after the FOMC meeting, discouraging PMI data did not help appease the virulent mood that was gathering momentum on Wall Street.
The US’S eye-watering level of debt, which has climbed to $35 trillion from $26 trillion in two years, is causing increased concern. It is also fair to say that Friday’s non-farm payrolls for July 2024 came in at a disappointingly benign level of just 117,000 jobs created last month. What many observers could not digest was – how do you get from GDP of 2.8% to recession in almost a heartbeat?
Set out below are some figures on the performance of the major US tech operators in the past two weeks, as well as the major global indices in the past week and year to date.
US TECH SINCE 16th JULY 2024 - NASDAQ -9.36%, AMAZON -12.95%, APPLE -6.38%, ALPHABET -9.19%, META -0.41%, NETFLIX -6.56%, MICROSOFT -9.11%, INTEL -38.23%, eBAY +1.81%, TESLA -19.45%, LAM RESEARCH -29.08%, NVIDIA -15.07%, SMCI -28.84%, ARM -35.20%
Global indices YTD – FTSE +5.87%, DAX +5.20%, CAC40 -3.71%, DJIA +5.36%, S&P500 +12.73%, NASDAQ +13.61%, NIKKEI +7.87%, HANG SENG +0.93%, SHANGHAI -1.92%, FTSE 250 +6.74%
Global indices last week – FTSE -1.34%, DAX -4.86%, CAC40 -3.92%, DJIA -2.28%, S&P500 -2.37%, NASDAQ -3.83%, NIKKEI -5.85%, HANG SENG -1.46%, SHANGHAI +0.55%, FTSE 250 -2.48%
What does this mean for UK equities? Over the same period, the FTSE has suffered rather less, as its poorly performing constituent stocks have been miners and energy. The losses have been inconsequential in comparison to the ‘tech larruping!’
Sadly, in recent years, UK equities have generally been valued at a 25% discount to its US peers. Why? Firstly, there is a perception that international investors disliked Brexit. For reasons I shall never fully understand global investors objected to the UK’S withdrawal from the “European Club.”
However, much more relevant, is that US domiciled retail investors account for 23% of equity markets whereas in the UK it is only 13.5%. Hence, if one recognises the power of US fund management and private equity and put all these ingredients together, it makes for a very strong cocktail of power and influence in the world of investing in and trading equities.
US investors, including retail operators, are far more engaged than their UK counterparts. Hence when warning signals are flagged up, reaction tends to be far more pronounced than it is in the UK. Life feels quite benign here in Old Blighty. However, it would be folly not to respect the influence the US has over most global markets!
If this sell-off is a natural market adjustment, then so be it. It just seems a bit precipitous for this reaction to signal recession in the US.
