A Few Thoughts On the Selloff

The stock market hit an all-time high last month. The rally was broadening out, and economic data and inflation were cooling, giving the Fed the green light to begin its long-anticipated cutting cycle. The VIX was low, and credit spreads were tight. And then boom, a powder keg of risk exploded out of nowhere.

The market began to sink last week as it became clear that the data was softening and the Fed was once again behind the curve. Initial jobless claims and other disappointing data sent the S&P 500 down 1.4% on Thursday. We got more weak employment data on Friday, and the S&P dropped 1.8%, its worst two-day decline since the Silicon Valley Bank collapse in March 2023.

Blowing air on the flame, over the weekend we learned that Buffett dumped half of his Apple exposure. Alex Morris notes that Apple is still 30% of Berkshire’s equity portfolio at the end of the second quarter. But context aside, Apple was likely to fall on this report, dragging down mega-cap tech with it.

The spark that lit the fuse happened last week in Japan when their central bank hiked interest rates. Last night came the explosion. Here’s the WSJ on what went down:

The Nikkei was up 18% on the year through the end of July. After two days of trading in August, its down 5% on the year. The Nikkei just had its second-largest drop ever outside of Black Monday in 1987.

The selloff right now is real. We’re living through the third-highest VIX spike ever, behind only the GFC and COVID-19.

It’s okay to feel anxious about all this, but giving in to fear is never a good strategy. Now is always a good time to have perspective. This selloff, while strong and painful, is a normal part of investing.

The S&P 500 is set to gap down a few percent this morning* leaving it ~9% off its all-time high but still up 9% on the year. I repeat, up 9% on the year. Those returns can be erased, but from returns and drawdown perspective, this is nothing. You all remember what 2022 was like.

Speaking of 2022, that year was so horrific for investors because the risk-off portion of their portfolio provided no stability. Bonds got hit just as hard as stocks did that year. This time around, bonds are providing diversification. Bonds are up 2% over the last four sessions.

Allow me to offer a positive outlook on what looks to be a very ugly day. This is an unwind: margin calls, leverage, selling everything, etc. I would much rather have this type of selloff than one that’s caused by earnings tanking and a re-rating in stock market multiples.

Over the weekend, I listened to the most recent calls from Amazon, Meta, and Apple. And let me tell you something: the backbone of our stock market is in the hands of really strong businesses.

Apple reported record revenue from its June quarter. AWS is reaccelerating. Meta’s revenue was up 22% year over year, while its expenses grew just 7%. Their revenue per employee is at an all-time high. But this won’t stop their stocks from getting killed today along with everything else. Now is the perfect time to quote the late John Bogle who famously said, “The stock market is a giant distraction from the business of investing.”

I don’t know when the selling stops or what this means in the long term, but I do know that this too shall pass. There are always reasons to sell.

*This is why people love private equity. Fewer marks, fewer problems.

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