MISSION NEWSLETTER
FOR MARKET CLOSE — Friday, July 19th, 2024
THIS WEEK IN THE MARKETS
U.S. MARKET INDEXES OVERVIEW
Continued Rotation to Small Caps
The major indexes ended mixed during a week marked by a continued rotation in market leadership toward small-cap and value shares. The week also saw a widespread global disruption to computer systems early Friday due to an error in a vendor’s security update for some users of the Microsoft operating system, though this had little impact on U.S. trading. A significant factor in the underperformance of growth stocks was a sharp decline in chip stocks on Wednesday, following news that the Biden administration was considering severe export curbs if companies like Tokyo Electron and ASML Holding continued providing China with access to advanced semiconductor technology. Consequently, chip giants Taiwan Semiconductor Manufacturing, Broadcom, and NVIDIA also fell sharply. Traders noted that polls indicating an increasing likelihood of a Republican sweep in the November elections appeared to favor value stocks, with the prospect of lighter banking regulation boosting the financial sector and higher tariffs under a potential Trump administration benefiting industrials and business services shares.
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 0.72% to end at 40,287.53 vs the prior week of 40,000.90
> 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 losses this week. NASDAQ was down 3.65% by closing this week, ending at 17,726.94 vs. the prior week of 18,398.45.
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 red this week. It was down 1.97%, closing at 5505.00 compared to last week’s 5615.35.
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> 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 red this week, down 0.18%. It went from last week’s close of 3020.71 to 3015.30.
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> 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 1.68% for the week, closing at 2184.35 compared to last week’s 2148.27.
U.S. COMMODITIES / FUTURES OVERVIEW
Commodities were down this week, showing poor performance.
THE VOLATILIY INDEX for 2024 (VIX)
VIX closed at 16.52 this week, a 32.58% increase vs last week’s close of 12.46.
THE CAPE Ratio
35.50– down 0.87% this month.
THIS WEEK’S ECONOMIC NEWS
FOR THE U.S. MARKET
Inflation and Labor in Better Balance
Fed Chair Jerome Powell addressed the central bank’s dual mandate on Monday, stating, “Now that inflation has come down and the labor market has indeed cooled off, we’re going to be looking at both mandates. They’re in much better balance.” The yield on the benchmark 10-year U.S. Treasury note fell alongside inflation concerns for most of the week before spiking Friday due to worries over the Microsoft disruptions. (Bond prices and yields move in opposite directions.) According to our traders, the municipal bond market absorbed a large primary calendar, which was particularly busy for the summer months, though the issuance softened the rate-driven rally on Tuesday. The level of issuance in the investment-grade corporate bond market surpassed expectations for the week, with most sectors closing with spreads unchanged to slightly tighter. High yield bonds traded higher amid a stronger macro backdrop as rates rallied due to the increased likelihood of Fed rate cuts sooner than December. After a slow start, trade volumes increased as demand strengthened, though issuance remained subdued throughout the week.
INTERNATIONAL MARKETS
LOOKING AT THE GLOBAL PICTURE
Europe
In local currency terms, the pan-European STOXX Europe 600 Index ended 2.68% lower amid rising trade tensions between the U.S. and China. Among major Continental indexes, Germany’s DAX dropped 3.07%, France’s CAC 40 lost 2.45%, and Italy’s FTSE MIB declined 1.05%. The UK’s FTSE 100 fell 1.18%. The European Central Bank (ECB) kept its key interest rates unchanged at 3.75%, stating it would not commit to any rate path and emphasizing that economic data would guide its decisions. ECB President Christine Lagarde indicated that a September move was "wide open," noting that risks to economic growth were "tilted to the downside" and that inflation would remain at current levels before declining in the second half of 2025. The ECB’s Bank Lending Survey for the three months through June showed household loan demand expanded for the first time in two years, driven by easier mortgage conditions and optimism about the housing market. However, industrial production in the euro area fell 0.6% in May, the first decline since January, with a 2.9% year-over-year drop and steep falls in Germany, Italy, and France. In the UK, headline annual inflation held steady at 2% in June due to a significant decline in energy costs, while core inflation remained at 3.5% and services inflation at 5.7%. Average earnings, excluding bonuses, grew by an annual 5.7% in the three months to May, down from 6.0% in April, but still nearly double the Bank of England’s 2% inflation target, sparking doubts about an August rate cut.
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Japan
Japan’s stock markets declined over the week, with the Nikkei 225 Index falling 2.7% and the broader TOPIX Index down 1.2%, primarily due to concerns about tighter U.S. restrictions on exporters of advanced semiconductor technology to China, affecting several Japanese chip makers. Speculation about the Bank of Japan (BoJ) potentially hiking interest rates at its July 30–31 meeting and detailing the tapering of its massive bond purchases caused the yield on the 10-year Japanese government bond to fall to 1.04% from 1.06% the previous week. The yen strengthened to around JPY 157.37 against the USD from the previous week’s 157.91, marking its second successive weekly gain following suspected government yen-buying operations. Japan’s top currency official, Masato Kanda, hinted at a response to excessive foreign exchange moves by speculators, though authorities usually do not confirm currency interventions immediately. Economic data revealed that the nationwide core consumer price index (CPI) rose 2.6% year-on-year (y/y) in June, slightly below the consensus estimate of 2.7% y/y, while the overall inflation rate remained steady at 2.8% y/y. Highlighting Japan’s economic fragility, the government lowered its GDP growth forecast for the fiscal year ending March 2025 to 0.9%, down from the 1.3% projected in January, due to sluggish domestic consumption and rising import costs from yen weakness. For the fiscal year beginning April 2025, the government expects demand-led growth of 1.2%.
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China
Chinese equities rose as investor sentiment remained largely unaffected by weaker-than-expected economic growth in the second quarter. The Shanghai Composite Index increased by 0.37%, and the blue-chip CSI 300 gained 1.92%. In contrast, Hong Kong's benchmark Hang Seng Index declined by 4.79%, according to FactSet. China's gross domestic product expanded by a below-consensus 4.7% year-on-year in the second quarter, down from 5.3% in the first quarter. Quarterly, the economy grew 0.7%, less than half of the first quarter's revised 1.5% expansion. Other data highlighted economic weakness: retail sales grew by 2% in June, down from 3.7% in May, partly due to lower sales of autos and household appliances. Industrial production rose by a better-than-expected 5.3% in June year-on-year but slowed from May's 5.6% increase. Fixed asset investment grew 3.9% in the January-to-June period year-on-year, in line with forecasts, though property investment fell 10.1%. The urban unemployment rate remained steady at 5%, while the youth jobless rate dropped to 13.2%, the lowest level since December.
THIS WEEK’S HIGHLIGHTED STORY
July 15th, 2024
What We’re Showing
This graphic lists the largest ETF, by assets under management (AUM), across the 11 major stock sectors. All data comes from VettaFi’s ETF database and is as of July 9, 2024.
Key Takeaways
ADDITIONAL MARKET HIGHLIGHT
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