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Will The Drop In Stock Markets Provide Opportunities For Investors?
INSIGHT WEEKLY: August 4, 2024
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Reading time of just 5 minutes to be well informed of the need-to-know topics of our times.
🌐 Major indexes and major stocks
Major market indexes:
Major markets declined sharply on Friday.
Here’s why.
Large-cap tech stock prices have been at high levels, US employment numbers are weak, inflation is sticky, interest rates have been higher for longer, and recessionary risks are increasing. There is not much incentive to hold, and so there was a global sell-off.
The trigger? The US unemployment data released on Friday.
In the last few weeks, there had been rotation in the markets as funds moved out of large companies into medium and smaller-sized companies.
However, even the Russell 2000, the index for small and medium-sized companies, declined over 6% in the week, as the global sell-off was across the board.
After setting records almost every week this year, many market indexes are now below their all-time highs. Only India’s Nifty 50 is near its all-time high, and it even set a new record on Thursday, before declining on Friday.
Magnificent 7:
There were declines across the board, except for Apple after announcing good results.
Major Semiconductor stocks:
After announcing plans to cut 15,000 jobs, Intel dropped 26% on Friday. For a long time, Intel’s chips were dominant in many devices and the “Intel Inside” logo was used to establish the brand. Now, Intel’s stock price is at a level first reached in the late 1990s.
PHLX Semiconductor index (SOX):
A wider “capitalization-weighted” index composed of the 30 largest semiconductor companies traded on US exchanges.
Will The Drop In Stock Markets Provide Opportunities For Investors?
Buying the dip is a strategy for some investors, but the market could continue to decline. Investor confidence is rattled currently.
Some investors prefer “dollar cost averaging” by drip-feeding their investments over a period of time to mitigate the risk of timing their entry into the market and to avoid over-trading by trying to guess the peaks and troughs.
The “random walk” hypothesis states that stock market prices evolve randomly and cannot be predicted, especially in the short term, therefore trying to beat the market is a futile exercise and comes with risk.
Others contest this hypothesis stating that patterns do exist and that “technical analysis” provides some predictability. This is the world of Bollinger bands, trend lines, RSI, moving average crosses, candlesticks, and many other indicators.
What does Warren Buffett (net worth of $134bn) think about long-term investing? Here is a quote from him.
“The stock market is designed to transfer money from the active to the patient”
🇬🇧 UK
Interest rates were cut by the Bank of England (BOE) on August 1st. The vote was 5-4 in favor of a cut. Another cut this year is expected, and it could be in November if inflation stays around the current level. The Governor of the BOE commented that the inflation mission is “not accomplished”.
Interest rates in the mortgage market have already declined in anticipation of this cut and may adjust further if there is confidence in the market of another cut in the next few months.
Public finance deficit of £22 billion has been announced and has quickly become a political issue. Tax hikes are inevitable. Likely targets are pensions and inheritances.
FTSE100 is -1.3% this week and +5.7% in the year to date.
🇺🇸 US
Job growth declined to the lowest level since October 2021. The unemployment rate increased from 4.1% to 4.3%. The non-farm payroll (NFP) indicated that the labor market was cooling more than expected.
Rate cut expectations jumped as the labor market data would influence the Federal Reserve to cut soon. Some are even calling for a cut of 0.5% rather than the usual 0.25%. The next Fed meeting is scheduled for September 17-18.
S&P500 is -1.8% this week and +12.1% year to date.
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🇯🇵 Japan
Interest rates were hiked as Japan continued its normalization journey and responded to inflationary pressures. The rate is now 0.25%, increasing from 0.1%.
Japan had negative interest rates till March this year, becoming the last country in the world to end negative interest rates.
Yen gained further strength after the interest rate hike. Against the dollar, it ended at 149.7 on Friday, but still a 9% decline in the year to date. The government spent $36.8 billion, to shore up the yen in July.
Stock markets declined dramatically on Friday, with the Nikkei 225 dropping nearly 6%. The interest rate hike and the consequent strengthening of the yen, and global market uncertainty spooked the market. The market closed before the US market opened, so there may be a further decline on Monday.
Nikkei 225 Index is -5% in the week and +7% in the year.
See previous spotlight on Japan.
🌐 Artificial Intelligence
This cover has been designed using assets from Freepik.com
UK Government cancels AI funding of £1.3bn. This funding was for a series of projects including £800m for a supercomputer at the University of Edinburgh and £500m for AI Research Resource, a general-purpose fund to be used for funding the compute power needed to boost AI.
Around £300m of the AI Research Resource has already been distributed.
It is not clear how the new government sees its role in promoting tech/AI.
Tech stocks declined this week as investors began to question the large amount of capital expenditure in AI and when it will pay off. This is not a new concern and the explanation of their strategies to investors did not stop the build-up of concerns.
Apple is using Google chips instead of Nvidia to build its infrastructure for its upcoming AI tools and features. It has used Google’s tensor processing unit (TPU) rather than Nvidia’s Graphical Processing Unit (GPU). The other difference is that Google offers access to its TPUs through its cloud computing services whereas Nvidia sells its GPUs to its customers. Apple has not explained its choice.
See previous spotlight on AI chips
🌐 Crypto Corner
Tracking Bitcoin price (up to August 2):
Bitcoin declined due to the US jobs report and recessionary fears.
Tracking Eth price (up to August 2):
Ether outflows from the recently launched ETFs continue with around $2bn moved out of Grayscale. Ether ETFs have not followed the Bitcoin ETFs price performance since the launch.
See the previous spotlight on Bitcoin halving
🏅5️⃣ Billionaire Leaderboard
Mostly driven by stock market performance :
Change in week :
Elon Musk (Tesla, SpaceX) $226bn ⬇️ $7bn
Jeff Bezos (Amazon) $187bn ⬇️ $13bn
Bernard Arnault and family (LVMH) $175bn ⬇️ $8bn
Mark Zuckerberg (Facebook/Meta) $171bn ⬆️ $8bn up one place after revenue growth
Larry Ellison (Oracle) $164bn ⬇️ $7bn down one place
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Stay tuned for more insights and updates each week.