VOO, VGT, DIA ETF stocks suffered a harsh reversal: I’m buying

American stocks dived on Friday as concerns that the US was moving into a hard landing continued. The Vanguard S&P 500 ETF (VOO) ETF slumped to $490 on Friday, down by over 5.69% from its highest level this year. 

Similarly, the Vanguard Information Technology (VGT) ETF slumped to a low of $530, down by over 13% from its highest level this year, meaning that it has moved into a deep correction. 

The closely-watched SPDR Dow Jones Industrial ETF (DIA) crashed to $393, much lower than the year-to-date high of $413. Other popular ETFs like the Invesco QQQ and SPDR S&P 500 (SPY) fund also slumped.

The recent crash in US equities was long overdue as I forecasted in my last article on the S&P 500 index. In that report, I warned that US stocks had become extremely overbought and that a reversal would be appropriate. 

US jobs data were positive for stocks

It is ironic that these ETFs plunged after the US published weak jobs data. The report had blemish everywhere. The economy created 114,000 jobs in July, a figure that will likely be worse in the next revision. 

In a report in July, the Bureau of Labor Statistics (BLS) showed that the economy added over 204,000 jobs in June, a figure that it revised downwards to 179k. 

The unemployment rate rose from 4.1% to 4.3%, missing the analysts estimate of 4.1% and its highest point since 2021. This is an important number since it has been in a strong uptrend after bottoming at 3.5% last year.

Wage growth has also stalled as the average hourly earnings dropped from 0.3% to 0.2% in July, translating to a year-on-year increase of 3.6%, down from the previous 3.8%.

These numbers are bad for the US economy as they show that the economy is indeed slowing. More recent data have point to this same situation. For example, a report by the Institute of Supply Management (ISM) showed that the employment part of the manufacturing sector worsened to its lowest level since 2021.

However, these numbers should also be welcomed by investors. For one, using the Philip’s curve theory, they mean that the inflation rate could continue falling in the coming months as it has done recently. 

The data mean that the Fed could change its tune and start cutting interest rates as soon as in its September meeting. Analysts at ING predicted that the Fed would deliver three interest rate cuts this year. They wrote:

“For now we are sticking with our three 25bp cut view for this year, but the risks do increasingly appear to be skewed to more aggressive action, especially in early 2025 we suspect.”

Rate cuts will be important for stocks because of the vast sums of money sitting in money market funds. The estimate is that investors have packed over $6.1 trillion in these funds, where they are earning about 5%. When rates starts falling, these funds could start moving to riskier assets like stocks and crypto.

Strong corporate earnings

The other catalyst for the VOO, VGT, and DIA ETFs is that corporate earnings are doing well this year.

While some companies like Amazon and Tesla have published weak results, the overall situation in the US has been much better. 

According to FactSet, 75% of all companies in the S&P 500 index have reported their second-quarter results. Of these firms, 78% have reported a positive EPS surprise and 60% positive revenue surprise. 

Most importantly, the blended earnings growth was 11.5%, the highest figure since Q4 of 2021, which is a good thing in the current phase of the cycle. Also, while stocks have jumped this year, their forward P/E ratio of 20.7 is slightly above its five-year average of 19.3.

More American companies will release their earnings next week. REITs like Simon Property Groyp and Realty Income will release on Monday and Tuesday. The other notable companies to watch will be Novo Nordisk, Eli Lilly, Disney, Sony, Amgen, and Caterpillar.

VOO, DIA, and VGT ETFs rise

The other reason to buy the ongoing dip in VOO, DIA, and VGT is that US stocks always bounce back after going through a big shake out. They all recovered after sinking in March 2020 as the Covid-19 pandemic started. 

Before that, the indices bounced back after crumbling during the housing crisis in 2008 and the dot com bubble in 2008/9. 

Earlier this year, the Dow Jones dropped by over 5.65% between March and April and by almost 5% in May. It then bounced back after this. While past performance is not an indicator of what will happen in the future, it is a sign of what could happen.