MISSION NEWSLETTER
FOR MARKET CLOSE — Friday, August 23rd, 2024
SHORT TERM SIGNAL CHANGE
As of Friday’s close, our volatility-based indicator STARFLUX, has returned to POSITIVE. The STARFLUX indicator had been steadily weakening as the market’s “AI-driven” march to new highs slowed over the summer months.? The market felt primed for a pullback and the catalyst was provided in the form of a tepid rate hike by the Bank of Japan. The S&P 500 declined close to 10% over three weeks as volatility spiked, triggering the sell signal in our indicator. Our intermediate and long-term indicators remained bullish throughout supporting our methodology that in active management not only “the trend is your friend”, but “the blend is your friend”, as well.
THIS WEEK IN THE MARKETS
U.S. MARKET INDEXES OVERVIEW
Stocks up in anticipation of rate cuts
Investors celebrated the news of impending interest rate cuts, driving the Dow Jones Industrial Average and S&P 500 Index closer to record highs. Federal Reserve Chair Jerome Powell's announcement at the Kansas City Fed’s annual economic symposium in Jackson Hole, Wyoming, that rate cuts were forthcoming, particularly boosted market sentiment. Stocks surged at the opening following the release of Powell’s speech, where he indicated that "the time has come for policy to adjust," suggesting that policymakers might cut rates at their September meeting, potentially by 50 basis points instead of the usual 25. The gains were widespread, with small-caps outperforming large-caps, and the equal-weighted S&P 500 Index outpacing its capitalization-weighted counterpart, despite light trading activity and some of the lowest daily volumes of the summer.
DOW & TECH
> THE DOW JONES INDUSTRIAL AVERAGE (DJIA) is the oldest continuing U.S. market index with over 100 years of history and is made up of 30 highly reputable “blue-chip” U.S. stocks (e.g. Coca-Cola Co., Microsoft).
The Dow showed a gain this week, ending the week up 1.27% to end at 41,175.08 vs the prior week of 40,659.76
> THE NASDAQ COMPOSITE INDEX tracks most of the stocks listed on the Nasdaq Stock Market - the second-largest stock exchange in the world. Over half of all stocks on the NASDAQ are tech stocks.
The tech-driven Nasdaq showed gains this week. NASDAQ was up 1.40% by closing this week, ending at 17,877.79 vs. the prior week of 17,631.72.
SMALL, MEDIUM, & LARGE CAP
> THE S&P 500 LARGE-CAP INDEX is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. The S&P 500 is regarded as one of the best gauges of prominent American equities' performance, and by extension, that of the stock market overall.
The S&P 500 was in the black this week. It was up 1.45%, closing at 5634.61 compared to last week’s 5554.25.
> THE S&P 400 MID-CAP INDEX is the benchmark index made up of 400 stocks that broadly represent companies with midrange market capitalization between $3.6 billion and $13.1 billion. It is used by investors as a gauge for market performance and directional trends in U.S. stocks.
The S&P 400 mid-cap was in the black this week, up 2.82%. It went from last week’s close of 3011.38 to 3096.25.
> THE RUSSELL 2000 (RUT) SMALL-CAP INDEX measures the performance of the 2,000 smaller companies included in the Russell 3000 Index. The Russell 2000 is managed by London's FTSE Russell Group and is widely regarded as a leading indicator of the U.S. economy because of its focus on smaller companies that focus on the U.S. market.
The Russel 2000 was up 3.58% for the week, closing at 2218.70 compared to last week’s 2141.92.
U.S. COMMODITIES / FUTURES OVERVIEW
THE VOLATILIY INDEX for 2024 (VIX)
VIX closed at 15.86 this week, a 7.16% increase vs last week’s close of 14.80
THE CAPE Ratio
36.34–up 5.39% this month.
THIS WEEK’S ECONOMIC NEWS
FOR THE U.S. MARKET
Policymakers mixed on Rate cuts:
The release of the Federal Reserve's July meeting minutes boosted market sentiment earlier in the week, as a "vast majority" of participants considered a September rate cut "likely appropriate," with "several" even supporting a cut in July due to increased confidence in disinflation and a better-balanced labor market. However, markets pulled back on Thursday following less-dovish comments from a few Fed officials, including Kansas City Fed President Jeffrey Schmid, who noted the labor market's strength and ongoing inflation concerns. The week's economic data mostly aligned with expectations, with S&P Global's first estimate for August showing continued expansion in the services sector despite a manufacturing slump. Existing home sales rose slightly, breaking a four-month decline, while the Labor Department's annual revision of nonfarm payrolls revealed 818,000 fewer jobs added over the past 12 months than initially reported.
INTERNATIONAL MARKETS
LOOKING AT THE GLOBAL PICTURE
Europe
The pan-European STOXX Europe 600 Index rose 1.31% in local currency terms, buoyed by hopes that the Federal Reserve and European Central Bank (ECB) would cut interest rates next month, with major stock indexes also gaining; Germany’s DAX added 1.70%, France’s CAC 40 gained 1.71%, Italy’s FTSE MIB climbed 1.83%, and the UK’s FTSE 100 increased by 0.20%. Eurozone business activity picked up in August, driven by the Paris Olympics boosting services output, though manufacturing continued to shrink for the 17th month. Meanwhile, eurozone wage growth slowed to 3.55% in Q2, and Germany's economic recovery faced further delays due to weak foreign demand. ECB officials, including Governors Olli Rehn and Fabio Panetta, supported a September rate cut, with the possibility of two more cuts this year. Sweden’s Riksbank also reduced its key policy rate to 3.5%, signaling additional rate cuts ahead, while UK business activity accelerated in August, with the S&P Global Composite PMI rising to 53.4, the highest since April.
Japan
Japan’s stock markets saw modest gains over the week, with the Nikkei 225 Index rising 0.8% and the TOPIX Index up 0.2%. Amid speculation that recent market turmoil might deter the Bank of Japan (BoJ) from further interest rate hikes, BoJ Governor Kazuo Ueda reaffirmed the central bank’s commitment to normalizing monetary policy, contingent on stable achievement of 2% inflation. Core consumer price inflation accelerated for the third consecutive month in July, supporting the BoJ’s hawkish stance. Meanwhile, the yen strengthened against the U.S. dollar, and the yield on the 10-year Japanese government bond rose to 0.90%. Despite market volatility following the BoJ's recent rate hike, Ueda emphasized the bank's readiness to adjust policy as needed, while closely monitoring sharp yen movements that could impact inflation forecasts. Economic data, including steady core inflation at 2.7% and healthy GDP growth, further bolstered the BoJ’s hawkish shift, with a stronger yen potentially easing import costs for domestic consumers.
China
Chinese stocks fell due to a light economic calendar and cautious sentiment ahead of Fed Chair Powell’s Jackson Hole speech, leading to weekly declines for both the Shanghai Composite and CSI 300 Indexes, while Hong Kong's Hang Seng Index saw gains. On Monday, the People’s Bank of China (PBOC) kept its benchmark lending rates unchanged, maintaining the one-year loan prime rate at 3.35% and the five-year loan prime rate at 3.85%, reflecting a focus on protecting bank profit margins. This decision was anticipated after the PBOC's unexpected rate cuts in July, though economists still foresee potential further easing later in the year, contingent on U.S. rate cuts. In earnings news, Baidu reported second-quarter revenue of RMB 33.9 billion, a 0.4% decrease from the previous year, despite earnings surpassing analysts’ expectations.
THIS WEEK’S HIGHLIGHTED STORY
August 8, 2024
The Rising Cost of Government Debt
What We’re Showing:
This graphic shows the net interest expense as a percentage of government revenue across major nations. Figures represent the average percentage for 2021 and 2023, in addition to the forecasted average for 2024 and 2026. Data is based on analysis from the Institute of International Finance (IIF).
Key Takeaways
ADDITIONAL MARKET HIGHLIGHT
August 7th, 2024
HOW VIX WORKS
The Volatility Index or VIX is the annualized implied volatility of a hypothetical S&P 500 stock option with 30 days to expiration. It can help investors estimate how much the S&P 500 Index will fluctuate in the next 30 days. While the VIX only measures the volatility of the S&P 500 Index, it has become a benchmark for the U.S. stock market.
The VIX is often referred to as the market’s “fear index or fear gauge”. The performance of the VIX is inversely related to the S&P 500 – when the price of the VIX goes up, the price of the S&P 500 usually goes down.
If the VIX is rising, demand for options is increasing, and therefore, becoming more expensive. If the VIX is falling, there's less demand, and options prices tend to fall. One thing to keep in mind is that current volatility cannot be known ahead of time. That's why it's a good idea to use the VIX in tandem with technical and fundamental analysis.
HOW CAPE WORKS
The cyclically adjusted price-to-earnings ratio (CAPE) can be used to smooth out the shorter-term earnings swings to get a longer-term assessment of market valuation. An extremely high CAPE ratio means that a company’s stock price is substantially higher than the company’s earnings would indicate and, therefore, overvalued. It is generally expected that the market will eventually correct the company’s stock price by pushing it down to its true value.
In the past, the CAPE ratio has proved its importance in identifying potential bubbles and market crashes. The historical average of the ratio for the S&P 500 Index is between 15-16, while the highest levels of the ratio have exceeded 30. The record-high levels occurred three times in the history of the U.S. financial markets. The first was in 1929 before the Wall Street crash that signaled the start of the Great Depression. The second was in the late 1990s before the Dotcom Crash, and the third came in 2007 before the 2007-2008 Financial Crisis.
THIS DOCUMENT HAS BEEN CREATED BY SHERMAN PORTFOLIOS. SOURCES FOR ITEMS DISCUSSED ARE LISTED BELOW.
Sources:
All index and returns data from Norgate Data and Commodity Systems Incorporated and Wall Street Journal
News from Reuters, Barron’s, Wall St. Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, visualcapitalist.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet, Morningstar/Ibbotson Associates, Corporate Finance Institute.
Commentary from T Rowe Price Global markets weekly update — https://www.troweprice.com/personal-investing/resources/insights/global-markets-weekly-update