MISSION NEWSLETTER
FOR MARKET CLOSE — Friday, July 5th, 2024
THIS WEEK IN THE MARKETS
U.S. MARKET INDEXES OVERVIEW
Limited advance in equites this week
The S&P 500 Index continued to reach record highs, although the market’s gains were notably narrow. Growth shares, as measured by the Russell 1000 indexes, outperformed value stocks by 415 basis points (4.15 percentage points), while small- and mid-cap benchmarks experienced losses. The technology-heavy Nasdaq Composite ended the week 73.71% above its lows since the market rebound began in mid- to late-2022, whereas the value-oriented Dow Jones Industrial Average gained only 32.79%. Trading volumes were lighter as the week progressed, partially due to the market closure on Thursday for Independence Day. Expectations for lower interest rates, driven by signs of weakening growth and easing inflation pressures, favored growth stocks by placing a lower implied discount on future earnings. On Monday, the Institute for Supply Management (ISM) reported its lowest manufacturing activity reading (48.5) since February, indicating contraction, and a separate reading showed an unexpected contraction in construction activity.
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 slight gain this week, ending the week of July 5th up 0.66% to end at 39,375.87 vs the prior week of 39,118.86
> 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 3.50 % by closing this week, ending at 18,352.76 vs. the prior week of 17,732.60.
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 1.95%, closing at 5567.19 compared to last week’s 5460.48.
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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 1.17%. It went from last week’s close of 2895.80 to 2931.86.
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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 down 1.02% for the week, closing at 2026.73 compared to last week’s 2047.69.
U.S. COMMODITIES / FUTURES OVERVIEW
Commodities continued the downtrend, showing poor performance across the board.
THE VOLATILIY INDEX for 2024 (VIX)
VIX closed at 12.48 this week, a 0.32% Increase vs last week’s close of 13.44.
THE CAPE Ratio
36.25– up 1.94% this month.
THIS WEEK’S ECONOMIC NEWS
FOR THE U.S. MARKET
Labor Market cools
Chief U.S. Economist Blerina Uru?i noted that the JOLTS data indicated sustained loosening in the labor market, with quits and hiring returning to pre-pandemic levels. The ratio of unemployed workers per job vacancy has decreased to 1.2 from around 2.0 during the peak of labor market tightness in 2022. The Labor Department’s official jobs report released on Friday confirmed a slowdown in job growth, with June job gains decreasing by 12,000 to 206,000, a smaller drop than expected. An increase in government jobs and health care employment helped offset weaknesses in private sector hiring, where employment in hotels, restaurants, and retailers declined slightly, possibly indicating reduced discretionary spending. Employment in temporary help agencies, often seen as a leading indicator of overall employment trends, fell by 49,000 jobs. Despite June employment growth being slightly stronger than anticipated, significant downward revisions were made to May and April data, and the unemployment rate rose to 4.1%. Additionally, annual wage inflation fell to 3.9%, aligning with the JOLTS quits rate, which has been indicating a further moderation in wage pressures.
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Labor market cooling does not mean weakness
Uru?i argues that labor market cooling does not equate to weakness, as the rising unemployment rate partly reflects higher labor supply and increased migrant flows. Nonetheless, she anticipates that Federal Reserve policymakers may be concerned about the unemployment rate's upward trend, potentially prompting a September rate cut if it continues and core inflation remains between 0.1% and 0.2% monthly. The slowing economy has also shown signs of easing inflation pressures, with ISM data indicating reduced growth in input prices for both services and manufacturing. Remarks from Fed Chair Jerome Powell at a European banking conference reassured investors, as he acknowledged significant progress in reducing inflation, despite it not likely reaching the Fed’s 2.0% target until late 2025 or 2026. This, along with the week's economic data, contributed to a decline in long-term U.S. Treasury yields, though bond market activity was generally light over the holiday-shortened week.
INTERNATIONAL MARKETS
LOOKING AT THE GLOBAL PICTURE
Europe
In local currency terms, the pan-European STOXX Europe 600 Index ended 1.01% higher, with political jitters easing as the far-right in France failed to win an outright majority in the first round of legislative elections on June 30, and the Labour Party won the UK general election on July 4 with a large majority. Major stock indexes also rose: France’s CAC 40 Index climbed 2.62%, Germany’s DAX gained 1.32%, and Italy’s FTSE MIB increased by 2.51%, while the UK’s FTSE 100 Index added 0.49%. The week saw political uncertainty with Marine Le Pen’s far-right National Rally leading in the first round of the French parliamentary election, causing significant losses for President Macron’s Ensemble, which came in third. ECB President Christine Lagarde struck a slightly hawkish tone at the ECB’s annual retreat, citing ongoing uncertainties regarding future inflation and the impact of profits, wages, and productivity. Minutes from the ECB’s June meeting revealed divisions over the rate cut, with some members opposing it due to surprising wage growth and persistent inflation. Eurozone inflation's final estimate showed a year-over-year decrease to 2.5% in June, though a key services component remained high, reinforcing the ECB’s cautious stance.
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Japan
Japan’s stock markets gained ground, with the Nikkei 225 Index climbing 3.36% and the broader TOPIX Index advancing 2.65% in local currency terms, both reaching all-time highs during the week. This rise was partly driven by weakness in the Japanese yen, which typically benefits export-focused industries, although the yen strengthened slightly later in the week. The yield on Japan’s 10-year sovereign bonds climbed to about 1.1%, its highest level since 2011, before easing alongside U.S. Treasury yields. Data from Japan’s largest union group showed an average wage increase of 5.1%, the largest in 33 years, although the final figure of 5.28% was slightly below initial estimates. However, consumer spending unexpectedly contracted in May, with household spending down 1.8% year over year and 0.3% sequentially, falling short of consensus estimates due to weak yen impacting overseas travel demand and rising prices leading to a 3.1% decline in food outlays.
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China
Chinese equities declined as disappointing manufacturing data underscored concerns about the slowing economy. The Shanghai Composite Index and the blue-chip CSI 300 both posted modest losses for the week, while Hong Kong's benchmark Hang Seng Index rose 0.46% during a holiday-shortened week, according to FactSet, with markets closed Monday for the Special Administrative Region Establishment Day. Government data revealed that China's manufacturing sector contracted in June for the second consecutive month, with the official manufacturing PMI remaining at 49.5, indicating contraction. The nonmanufacturing PMI also fell to 50.5, below expectations. Conversely, the private Caixin/S&P Global survey showed a slight improvement in manufacturing activity, rising to 51.8, though the services PMI decreased to 51.2. These mixed PMI readings highlight the uneven performance of China’s economy amid a prolonged property slump and rising trade tensions. Additionally, the value of new home sales by the top 100 developers fell 17% in June year-on-year, an improvement from May’s 34% decline, raising hopes for recovery in the housing market following a government rescue package announced in May.
THIS WEEK’S HIGHLIGHTED STORY
June 21th, 2024
The Stocks Driving S&P 500 Returns
What We’re Showing
This graphic shows the top 10 stocks fueling S&P 500 returns in 2024, based on data from Goldman Sachs. Figures are as of June 13, 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 NEWSLETTER WAS 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