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Investors were briefly transported back to March 2020 on Monday as markets melted down and a widely followed volatility index skyrocketed to its highest level in nearly four and a half years.
After a promising end to a rocky July, the S&P 500 fell 6.1% in the first three trading days of August and was on pace for its worst month since September 2022. After a small rebound early on Tuesday, the index was down 8% from its mid-July peak.
That rapid collapse sent volatility — as measured by the CBOE Volatility Index, or VIX — spiking to a historically high mark of 65.7. For reference, the VIX rarely rises above 30. Such surges are only comparable to the throes of the financial crisis and the onset of the pandemic.
However, strategists at major firms like UBS and Oppenheimer think that panic is overblown. While there's risk in markets, their strategists say US stocks have more upside than downside.
"Market returns tend to be depressed when volatility is low, and greatest when the VIX is extended," Jonathan Golub, the chief US equity strategist at UBS, wrote in early August. "The recent sell-off represents a near-term buying opportunity."
UBS
Although stocks had been on a heater for most of 2024, some investors still felt uneasy. The S&P 500's rich valuation troubled some, as did widespread optimism about artificial intelligence. Other risks included slowing economic data, political uncertainty at home, and unrest abroad.
While those concerns served as the kindling, it was the July jobs report that sparked terror. The US unemployment rate jumped to 4.3%, up from a low of 3.4% last spring. The 114,000 jobs added missed expectations by over 60,000, and wage growth came in weak.
Oppenheimer
Jason Draho, the head of asset allocation at UBS Global Wealth Management (GWM), remarked in an August 5 note that after months of weaker-than-hoped economic growth data, Friday's dismal jobs report "seems to be the proverbial straw that broke investors' back."
Draho's colleagues agreed, as UBS GWM investment chief Americas Solita Marcelli called the jobs report "undeniably disappointing" since economic momentum seems to be fading quickly.
"While the US unemployment rate is still relatively low by historical standards, such a rapid rise in unemployment in the past has often been associated with an abrupt slowing of economic growth," Marcelli wrote. She noted that Hurricane Beryl likely affected the data, though that alone isn't a sufficient excuse for the subpar report.
Though the labor market is weakening, along with other key measures like manufacturing data, most Wall Street strategists still believe a recession is unlikely.
A closer look at the jobs report reveals that while job additions underwhelmed, jobless claims were also minimal. That suggests many workers are staying in place, as does a low quit rate.
"Labor demand has cooled and could crack, but the dynamic playing out so far is that companies are hiring fewer workers and laying off very few," Draho wrote.
UBS
As long as consumers keep spending, the US economy should stay afloat, since that category accounts for over 67% of US GDP. Spending may be softening, but Draho wrote it's still healthy and is simply returning to more normal levels.
Persistent spending should power corporate earnings, which, in turn, will fuel economic growth.
"Companies usually lay off workers as a last resort when profits and margins are falling," Draho wrote. "That's not the case for S&P 500 companies, which are on pace to grow earnings per share 11% in 2024."
Second-quarter earnings growth has been impressive so far and seems set to rise by low single digits, according to UBS GMW. David Lefkowitz, the firm's US equities head, wrote recently that 75% of firms are beating earnings estimates while roughly 60% are clearing the bar on revenue.
John Stoltzfus, the chief investment strategist at Oppenheimer, has also been pleased with Q2 results. The bullish strategy chief remarked in a note Monday that six of the 11 market sectors have enjoyed double-digit earnings growth this quarter, while only three have seen declines.
After telling Business Insider early last week that his confidence wasn't shaken by this selloff, Stoltzfus is sticking to his upbeat stance. Like his counterparts at UBS, he's hunting for buying opportunities, especially in the technology, consumer discretionary, and industrials sectors.
"Such sell-offs can offer an opportunity to 'catch babies tossed out with the bath water,'" Stoltzfus wrote. He later added: "The sell-off that took place looked to us like the actions of a mix of bears — many of whom ironically had capitulated in droves throughout the first half of this year, nervous investors, and short-term traders who found catalyst as well in the reaction to the jobs number to take some profits without FOMO (fear of missing out)."
