A few weeks ago I wrote about the market decline and why I thought we had a little more to go. Turns out I was right – not to brag. These falls throughout the year are not uncommon. In fact, the average decline in any given year is about 14%.
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The S&P 500 is now in the green for August, having climbed nearly 7% out of its most recent hole. To put things into perspective, that's put stocks just 2% off all-time highs reached a month ago.
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I believe there were a few triggers that cracked the market:
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The Bank of Japan raising rates by 0.25% and unwinding the free carry trade that many hedge funds had in place – not individual investors, hedge funds!
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A weaker US jobs reports – which is probably a post pandemic flush out from a period of pent-up jobs.
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A weaker than expected reporting period from the big AI players – maybe it was expectations more so than the actual earnings?
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Warren Buffett's disclosure of his 50% reducing in holdings of Apple.
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All of these factors, which I believe at this point are independent of each other, had a massive hit to investors sentiment. And unfortunately, investor sentiment plays a huge role in what happens to stocks – I mean, we see each and every day with the tickers moving up and down.
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The media is full of anecdotes from earnings calls about the economy supposedly slowing down. Here's Apollo's Torsten Sløk:
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The latest company earnings reports show us that there is no sign of an imminent recession. More than 90% of the S&P 500 companies have reported their earnings for Q2. Collectively, S&P 500 operating earnings per share (EPS) rose 10.9% y/y during the quarter to a record high of $60.19 – see charts below:
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As much as sentiment moves markets, the one factor that really matters is earnings. In fact, this is the true signal amongst all the noise.
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Just because the market isn't playing out the way you want it to, doesn't mean the market isn't still in a relatively strong position. I still believe the market fundamentals are strong. We're no doubt going to go through a flushing of the post COVID period with jobs, savings rates, retail sales etc. But that doesn't mean the world is coming to an end. For now, I remain bullish.
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Don't hate the player, hate the game.
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