It should be no surprise that the big sell-off has battered Nasdaq into correction territory (a fall of 10% or more from its most recent peak) — after all, that’s where the bulls were at their most bullish and where the bubble has been greatest: in AI stocks and especially the so-called Magnificent Seven.
Nasdaq’s 2.2% slide on Friday put it into a correction as concerns about Big Tech valuations and a cooling economy clashed, with valuation concerns winning out decisively.
A softer-than-expected job report for July didn’t help, but disappointing forecasts from Amazon and Intel late Thursday spilled over into the markets on Friday, adding to valuation concerns and overwhelming enthusiasm for Apple.
As a result, growing concerns about the money pouring into AI without apparent payoffs and fears of an overall earnings impact caused bulls in and around Big Tech to lose faith and sell.
So, Friday saw a push to take whatever profits could be made from the crashing megacap boom and the AI bubble, with investors retreating to the sidelines, ignoring the positive jobs data.
That left the Nasdaq down 10.2% from its record high close of 18,647.45 points on July 10. The S&P 500 and Dow were 5.7% and 3.9% below their all-time highs, respectively.
An index or stock is widely considered to be in a correction, signaling investor pessimism, when it closes 10% or more below its previous record closing high.
The Nasdaq’s recent sell-off comes after investors sold Wall Street’s heavyweight stocks following lackluster results from Tesla and Alphabet. This compounded investor worries about stretched valuations and concerns that a rally fueled by optimism about AI technology may have become overextended.
Intel shares lost 26% — bigger than Thursday’s after-hours fall of around 22% — after its quarterly results and announcement of huge job and spending cuts made it clear the once-dominant chipmaker had completely lost its way. It is still worth US$97 billion, which makes it too big to be taken over, given its current problems.
Nvidia, Microsoft, and other Big Tech stocks have been key drivers of Wall Street’s rise to record highs in 2024, lifted by expectations of interest rate cuts this year by the US Federal Reserve and the euphoria around AI.
For the time being, no more. The June/July quarterly earnings seasons are almost over, with media and the start of retail this week and next, followed by the big test at the end of the month with Nvidia.
What makes the sell-off odd is the small amount of “bad” news that triggered it: a weak survey of manufacturing and several other parts of the economy, followed by a weaker-than-forecast jobs figure.
The activity surveys have been weak for the US for months. There was a brief sell-off on the same basis a couple of months ago, but consumer spending remains solid (as retail sales figures show), inflation is easing, investment remains solid, the trade account is a weakness, and the jobs market is also solid.
Additionally, August is usually a month of low turnovers as traders and others take summer holidays. Volumes and interest pick up after Labor Day on September 2.
Morningstar pointed out late last week that over the past 36 years, August has actually been the worst month for the Dow and the second-worst month for the S&P 500, the Nasdaq, and the Russell 2000 (an index covering smaller-cap companies).
Normally, the weak jobs report would have been bullish, especially after Fed Chair Jay Powell put a rate cut at next month’s meeting firmly on the table.
In fact, the same people now criticizing the Fed for not cutting this week were the ones looking forward to a rate cut next month without any second thoughts about what the bank didn’t cut at last week’s meeting.
The S&P 500 took a hit on Friday, losing 1.84% to end at 5,346.56. Nasdaq lost 2.43% to 16,776.16, while the Dow fell 610.71 points, or 1.51%, to finish at 39,737.26.
At its session low, the 30-stock blue chip index was down 989 points.
So, that all saw Wall Street down on the day and week, bond yields tumbled, as did oil prices and the US dollar. Gold rose. The weakness in the greenback was unusual and not a normal occurrence when volatility rises.
July’s job growth in the US slowed more than expected, while the unemployment rate rose to the highest since October 2021. Non-farm payrolls grew by just 114,000 last month, a slowing from 179,000 jobs added in June (down from 206,000 originally reported) and below the 185,000 expected by economists. The unemployment rate increased to 4.3%, the highest for two years and well up on the 3.5% in July 2023.
Deutsche Bank’s global economics and thematic research, Jim Reid, wrote in a Friday note, “The past 24 hours have seen an increasingly precarious backdrop for risk markets with a risk-off mood on the back of another batch of weak U.S. data yesterday followed by mostly downbeat tech earnings overnight.”
The 10-year Treasury yield fell to its lowest since December (3.79% for the 10-year bond, 3.89% for the 2-year bond) as investors flooded into bonds for safety. That’s why gold perked up, but it was coming off a couple of near-record days, so the gain wasn’t as great.
For the week, the Dow lost 2.11%, the S&P 500 fell 2%, and Nasdaq lost 3.35%.
Nasdaq is now back to levels last seen in late May, so all those gains of June and especially July have been wiped out.
And what can all those AI programs tell investors about what is going to happen now and what they should do?
Follow Warren Buffett and take your profits and more, and run?