Market Commentary

Volatility Reemerges

The relatively tranquil market conditions of the past 18 months quickly disappeared over the last few days. There were several possible catalysts cited for the market selloff including the following:.

• An unwind of the Yen carry trade resulting in a 20% selloff in the Japanese stock market. On Monday August 5th Japanese stocks fell 12%, the worst one- day decline since the 1987 stock market crash.
• The U.S. Federal Reserve (the Fed) deciding not to cut interest rates was followed a day later by a relatively weak U.S. jobs report which showed slowing in hiring across industries. This fueled fears that the Fed’s interest rate policy may be too restrictive for an economy that is slowing, thus increasing the probability of a hard landing/recession.
• While earnings reports are still relatively strong, the forward guidance provided by several large companies disappointed investors, not meeting their lofty expectations.
• Warren Buffett selling half of his Apple stock position causing Berkshire’s cash stockpile to grow to $276 billion. Some viewed this as a possible sign that Buffett is growing bearish on stocks. This is very likely a misplaced concern, as Warren Buffett is the farthest thing from a macro investor who attempts to make big market calls.

There is an adage that very low-volatility periods eventually result in hyper-volatility. The sudden shift from a fairly complacent market to one filled with fear could be observed in the CBOE Volatility Index, or VIX, as it jumped more than 50% during Monday’s selloff in the U.S. financial markets.

While the recent selloff in equities is certainly not fun, it is a normal part of the financial markets. [1]One of our analysts shared with our investment committee that on average the stock market suffers seven 3% selloffs per year and one 10% correction each year. Unfortunately, volatility is the price that must be paid for the long-term returns offered by equities.

Sharp market selloffs can test the resolve of any investor. But indiscriminate selling is rarely an effective strategy. One notable hallmark of Monday’s selloff was how everything fell in unison. Great companies fell, along with poorly run ones. For example, after just announcing their cash hoard had grown to $276 billion after recent stock sales, Berkshire Hathaway’s stock fell 3% on Monday. But why? Berkshire has a fortress balance sheet with one of the best collections of businesses of any American company and is run by one the greatest capital allocators of all time. If stocks really do enter a bear market, this talented capital allocator, namely Warren Buffett, will happily put some of that cash to work to increase future returns for shareholders.

We strive to focus our efforts on the things we can control—constructing a properly diversified asset allocation populated with well-capitalized and resilient companies. Companies selected not just for fair weather, but ones with both the balance sheet strength and capable management teams that can safely steer the ship to port even in treacherous conditions.

We are no less convicted about the companies we own today than we were last week. Therefore, we want to avoid the temptation to sell these quality businesses, giving away future gains to another nameless investor.

We appreciate the trust you place in us. Know that our entire team stands ready to serve you and your family.

[1] Source: Carson Investment Research, Ned Davis Research 01/03/2024

_{The opinions expressed are those of PYAW’s Investment Team. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. This information is not a recommendation to buy, sell, or hold any particular security. Forward-looking statements cannot be guaranteed.}

_{PYA Waltman Capital, LLC (“PYAW”) is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about PYAW’s investment advisory services can be found in its Form ADV Part 2, which is available upon request.  PYA-24-23}