IS THIS A DEAD CAT BOUNCE?
?DJIA 52-wk: +14.47% YTD: +7.69% Wkly: +0.75%?
?S&P 500 52-wk: +19.14% YTD: +14.45% Wky: 0.83%
?NASDAQ 52-wk: +21.24% YTD: +15.83% Wkly: -2.08%
?S&P SmallCap 600: 52-wk: +12.48% YTD: +8.43% Wkly: +3.54%
LAST WEEK:
Was one for the record books, featuring the largest red day for ES since December 2022 on Wednesday, with ES snapping a historic 357-day streak with a 2% red day.?As a result of this, ES put in another red week, making this the second red week in a row.?Red weeks have been relatively rare in 2024.?We only had two red weeks in a row on three other occasions, two of which bottoms were set afterwards, and one of which (April) we put in a third red week then rallied 700 points.
ON FRIDAY:
S&P 500 JUMPED 1.1% for its best day in seven weeks after 3M and several other big companies delivered better profits than analysts expected.?
ACCORDING TO DATA:
From the CME Group, traders are banking on a 100% probability the FED will begin easing.?
“Income growth is slow, spending growth is moderating, goods prices are in deflation, service price inflation is tame,” said Brian Jacobsen, chief economist at Annex Wealth Management.? “If this doesn’t give the Fed confidence to cut, nothing will.”
U.S. Treasury Bond Markets and America’s Growing Debt:
Bottom Line for Investors
Mitch Zacks wants to reiterate my position—that mounting deficits and national debt should not be written off as nothingburgers. Rising deficits during a period of high interest rates can drive up interest costs as a percent of GDP, which can crowd out more productive government spending and serve as a significant drag on economic growth.
But it’s also my view that the U.S.’s current fiscal situation is not in a state that’s likely to be harmful to growth in the short to medium term. Interest rates in the late 1970s and early 1980s pushed interest costs as a percent of GDP to levels much higher than we’re seeing today, and the U.S. economy managed to work its way through it.
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THIS WEEKS INTERESTING SECTOR PIECE WHAT COMES NEXT AFTER THE ROTATION:
What Comes Next After the Stock Market’s Rotation. The ‘Exhaustion’ Factor
Forget?Team Trump versus Team Kamala. All the market cares about is?Team Tech versus Team Rotation.
It isn’t hard to see why the focus is on the run-up to the election, which has been more dramatic than usual. Vice President Kamala Harris is?now the presumed Democratic nominee?after President Joe Biden’s disastrous debate performance confirmed what many already knew—he’s just too old for a second term. Nor is it hard to find someone who will blame Harris’ ascension for the stock market’s tough week because it made the election’s outcome less certain, just as many credited the?rising odds of a Red Wave?that would see the Republicans take the House and the Senate for some of the recent gains.
Please. Nearly everything that can be attributed to Trump or Harris can be explained by the economic data, assumptions about the Federal Reserve, or just run-of-the-mill business activity. The outperformance of the small-cap?Russell 2000.
?index relative to the?S&P 500?
?and?Nasdaq Composite?
It began with?June’s consumer price index, which was weak enough for investors to price in a nearly 100% chance of a rate cut in September. It continued as investors fretted about whether the?artificial-intelligence trade?had gotten ahead of itself after?Alphabet?and?Tesla?reported earnings.
Even the selloff in solar stocks likely had as much to do with problems at?SunPower.
a large residential installer of solar panels, as anything to do with Trump.
“On the surface, the intense political climate seems to have caused a notable shift in the marketplace, moving from prominent tech stocks to cyclical, defense, and small-caps,” writes Jeff O’Connor, head of market structure at Liquidnet. “However, it’s hard to attribute this rotation solely to political events. Historically, the impact of presidential elections on the market has been far less pronounced than perceived.”
What really matters is the impact of interest-rate cuts, the strength of the economy, and the direction of earnings. Rate cuts, in particular, are most helpful for companies that are economically sensitive, have a lot of debt, or are just plain small. That’s reflected in the performance of small- versus large-caps, with the Russell 2000 outperforming the S&P 500 by 12.7 percentage points over the 12 days ended July 24, the largest gap for that period on record. The rally has been so intense, and the drop in the S&P 500 large enough, that the Russell, which started July up 1% for the year, is now up 11%—just three percentage points behind the large-cap index’s 14% rise.
Sustaining the rotation won’t be easy. Much of the tailwind from rate cuts is already reflected in the?iShares Russell 2000?
exchange-traded fund, which is trading at a steeper premium to the?SPDR S&P 500?ETF than it had been at the end of June.
The expectation of rate cuts—and the widening valuation gap—means that further gains in small-caps will likely be smaller and come at a reduced pace, says 22V Research strategist Dennis DeBusschere.
Whether the rotation has legs could come down to both rates and the economy. Bank of America’s Ohsung Kwon looked at when the equal-weight S&P 500—another proxy for the rotation trade—outperformed the market-cap-weighted version of the index. He found that it did so 90% of the time when the yield on the 10-year Treasury fell a full point from its 12-month high and when the Institute for Supply Management’s manufacturing purchasing managers index rose over four points from its lows. For those two things to happen now, the 10-year yield would have to drop to 3.99% from a recent 4.21%, and the PMI would have to hit 50.5, from June’s 48.5. That seems like a big ask.
Tech stocks have their own issues. Partially weighing on the stocks: the big spending on AI and whether those investments will ultimately pay off.
Investors will get more information this coming week when?Microsoft,?Apple,?Amazon.com, and?Meta Platforms?report earnings. John Higgins, chief markets economist at Capital Economics, is optimistic about the ability of Big Tech to keep Wall Street satisfied through the end of 2025.
“Even if the Magnificent Seven only meet expectations for growth in EPS through the end of next year...we suspect their aggregate market value will continue to rise as their combined price/forward 12-month earnings ratio expands further,” he writes.
The stock market, though, may still be headed lower. August and September are historically the worst-performing months of the year for the S&P 500. Rich Ross, head of technical analysis at Evercore ISI, expects the index to drop to at least 5250—or 8% below its recent high—before getting set to rally again. He also worries that small-caps and other rotation beneficiaries are showing signs of “exhaustion,” leaving investors in something of a bind.
For now, it might be best to simply ride it out: Don’t give up on the tech trade but hold a little cash and make sure to have exposure to stocks beyond the Mag 7. Right now, is one of those times when it’s better to find a middle ground than pick a side.
Brace yourself.? Earning season continues with serious implications about the near-term direction of the stock market.? MSFT announces on Tuesday, META on Wednesday, AMZN & APPLE on Thursday.?
—?Richie
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