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The Stock Market's Temper Tantrum
The Fed isn't here to save your portfolio.
Travis Hoium
August 02, 2024
In partnership with
The stock market had a temper tantrum late this week.
Many investors blamed the Fed, who decided not to cut rates this week.
The market is testing the Fed's resolve.
— ◢ J◎e McCann 🧊 (@joemccann)
5:24 PM • Aug 1, 2024
Let me be clear, it’s not the Fed’s job to keep stock prices high.
It’s not the Fed’s job to keep fueling the runup in growth stocks. Or artificial intelligence. Or Bitcoin. Or housing. Or assets in general.
It’s the Fed’s job to control inflation and keep the overall economy growing.
A rate cut will make a minimal impact on the economy whether it’s done today, next week, next month, or early next year.
However, rate cuts will have an impact on stock and bond prices today…and that’s why talking heads are upset.
I just want to make that distinction clear because long-term it’s earnings and business models that will drive asymmetric returns, not the Fed.
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Taking Risk Without Risking Everything
Regular readers know that I’ve been taking a more cautious approach to the monthly Asymmetric Portfolio investments of late. I’ve been leaning toward cheap stocks with good balance sheets and strong cash flows, rather than buying moonshots.
My basic argument is that high earnings multiples for many stocks weren’t justified because either fundamentals don’t warrant the values (ex. Apple) or the driver of stock prices didn’t have a sustainable business model (AI). All the while, economic and earnings indicators were telling us “something is wrong”. Here are five such articles I’ve written in the last 3+ months to this effect.
What Pepsi and Wells Fargo Tell Us About Earnings Season: Early results weren’t encouraging.
Something Seems Fishy on Wall Street: The stock market is at all-time highs but the data tells a different story.
3 Earnings Reports Send a Warning About the Market: UiPath, Salesforce, and Dell are telling us something.
Making Sense Of a Crazy Stock Market: Economic indicators are flashing a warning sign, so why are stocks still going up?
Defense Is the Best Offense: Now is not the time to pay a premium for hot stocks.
I’m not patting myself on the back for congratulations. The Asymmetric Portfolio is having a terrible week.
Rather, I’m pointing out that a pullback from high valuations is normal and should be expected.
And if you’ve been reading what I’ve written or listened to any consumer goods conference calls…this isn’t surprising.
Believe What They’re Telling Us
CEOs and other executives have been consistent about what’s happening in the economy.
Consumer spending — which fuels the economy — is slowing.
Walmart’s CFO said in May:
Many consumer pocketbooks are still stretched, and we see the effect of that in our business mix as they're spending more of their paychecks on non-discretionary categories and less on general merchandise.
Target’s Chief Growth Officer said in May:
consumer confidence took a meaningful dip in April despite a strong job market and normalizing inflation. And beyond the psychological toll of the current environment, the sustained level of elevated prices has had a meaningful impact on budgets and savings for many families. Currently, 1 in 3 Americans has maxed out or is nearing the limit on at least one of their credit cards. For these reasons and more, we remain cautious in our near-term growth outlook. Notably, we expect discretionary trends will continue to remain pressured in the short term, but to normalize over time. Turning to our first quarter results, comparable sales were down 3.7%
Home Depot’s VP of Merchandising said the same in May:
Big ticket comp transactions or those over $1,000 were down 6.5% compared to the first quarter of last year. We continue to see softer engagement in larger discretionary projects where customers typically use financing to fund the projects such as kitchen and bath remodels.
Amazon’s CFO said it again this week:
We're seeing a lot of the same consumer trends that we have been talking about for the last year. Consumers are careful with their spend, trading down, looking for lower ASP products, looking for deals. That continued into Q2, and we expect it to continue into Q3. We're seeing signs of it continuing in Q3.
Consumers are trading down.
They’re looking for deals.
Next thing you know, they’ll be spending less.
Companies will respond by spending and hiring less themselves.
This trend isn’t over.
A bad week on the stock market isn’t a correction.
A recession is coming…eventually.
It’s the natural economic cycle and it will likely lead to more pain for stock prices.
And still, I’m buying stocks this week and next. If stocks fall enough I’ll move further out on the risk curve, but for now, there are too many cheap stocks to pass up. Premium members can find out what I’m buying right now here.
You can get all Asymmetric Investing content, including deep dives, stock trades, and ongoing coverage of Asymmetric Universe stocks with a premium membership.
All for only $100 per year.
Disclaimer: Asymmetric Investing provides analysis and research but DOES NOT provide individual financial advice. Travis Hoium may have a position in some of the stocks mentioned. All content is for informational purposes only. Asymmetric Investing is not a registered investment, legal, or tax advisor or a broker/dealer. Trading any asset involves risk and could result in significant capital losses. Please, do your own research before acquiring stocks.
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