By Pete Biebel, Senior Vice President, Senior Investment Strategist
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The machinery of the stock market has been humming along fairly smoothly through the first half of 2024. The broad-market averages have augured higher thanks largely to big gains in a handful of mega-cap tech stocks. Through the first six months of the year, the S&P 500 Index (SPX) chalked up a gain of more than 14%. The NASDAQ Composite Index (COMP), with its even higher weighting in those big tech stocks, racked up an increase of more than 18%. However, drilling down to the less tech-heavy indices reveals a vastly different picture. Through the end of June, the equal-weight version of the S&P 500 was up just a bit more than 4%. The Dow Jones Industrial Average (DJIA) had a net gain of a bit less than 4%, and the Russell 2000 Index of small-cap stocks (RUT) chiseled out a net gain of just over 1%. The tech-heavy indices had all the traction of a belt sander while most other indices, sectors and individual stocks lagged.
But there has been a noticeable gear shift in the market’s machinery since the end of June, and the most significant rotation came last week. DJIA notched a 1.59% gain, not a big deal, but it was its best week since early May and it outperformed both SPX (+0.87%) and COMP (+0.25%). And the lowly RUT hammered higher by more than 6% for its best week in eight months.
There was also significant rotation at the sector level. The real estate sector, which is the only sector that’s still in the red for 2024, led all the others with a 4.4% gain. The next three of last week’s top sectors are also among this year’s underperformers. The utilities sector gained about 4%, materials gained about 3% and healthcare added 2.7%. Two of the year-to-date leading sectors – technology and communication services – were near the bottom of the list last week. Tech gained just 0.4% for the week, and the communication services sector lost 1.7%.
At the outset last week, the drill for the market was to get through several key events. First up was U.S. Federal Reserve (Fed) Chairman Powell’s congressional testimony on Tuesday and Wednesday. The averages were essentially level through the first two days of the week, but the action picked up considerably on Wednesday after Chairman Powell suggested that the central bank was likely nearing its first rate cut. The popular averages all gained 1% or more, with SPX closing above the 5600 level for the first time and COMP also reaching a new high.
The second key event was the release of the Consumer Price Index (CPI) data Thursday morning. Headline CPI for June came in at down 0.1%, the first month-over-month decline in more than four years. The year-over-year headline inflation for June was +3.0%, a tick lower than expected and the lowest year-over-year number since March 2021. The core inflation numbers, which ignore food and energy prices, were equally favorable. Month-over-month core CPI was +0.1%, a tick lower than expected, while year-over-year core CPI was also a tick lower than expected at 3.3%. Both core readings were the lowest since the spring of 2021.
That news, combined with the previous day’s Fed-speak, produced one of the strangest market days in years. The smooth humming market machinery went kablooy. Immediately following the CPI news, the yield on benchmark 10-year U.S. Treasury notes fell from 4.3% to 4.18%. When stocks opened for trading, the averages all moved higher with SPX and COMP touching new highs. But, before the end of the first hour of trading, both SPX and COMP dropped to losses for the day. That was a hint that things were about to get whacky.
That combination of cooling inflation and an increasing likelihood of a Fed rate cut in September (the futures market is now pricing in about a 94% probability of a rate cut in September) inspired a manic rotation out of the leading big tech stocks and into the lagging sectors and small-cap stocks. By the end of the session, SPX was down about 1%. COMP fell 2%, its worst day since April. Meanwhile, there was a feeding frenzy for value among the lagging sectors and small caps. DJIA was up 1% for the day. The equal-weight S&P 500 (SPXEW) did a bit better, up 1.2%. That combination of SPXEW up 1+% and SPX down 1% on the same day has never happened before. The big winner on the day was RUT, which gained nearly 3.6%. According to Dow Jones Market Data, Thursday marked the largest single-day outperformance by RUT over COMP in data going back to 1986.
And it gets wackier. Thursday set a new record for the most net advancing issues on the New York Stock Exchange (NYSE) on a day that SPX declined. NYSE had 2,434 advancing issues that day versus 405 declining issues. On a day that the index was down 1%, nearly 400 SPX stocks were higher on the day against a little more than 100 that declined.
The third key event was Friday morning’s Producer Price Index (PPI) data. Following Thursday’s favorable CPI numbers, the PPI numbers were all a tick or two higher than expected. The slightly hotter PPI data had the effect of throttling back the rush into value. The major indices all gained about 0.6% on Friday, with RUT once again outperforming by climbing a bit more than 1%. SPX touched a new intraday high but ended the day below Wednesday’s record level. DJIA also reached a new intraday high but could not hang on for a new closing high. DJIA ended the week at 40,000.90, a couple points below its record May 17 closing level.
The market’s action last week really gummed up the works. It was the mirror image of how the machine had been functioning for a year or more. Many analysts and investors are hoping that last week’s antics were just the beginning of a renewed and continuing appetite for value stocks. Not many of them would be too surprised or disappointed if it also was the beginning of a declining appetite for the mega-cap tech stocks. On a research call last week, I told our advisors that I believe the key group to watch is the semiconductor stocks. If their relative performance fades, then we should expect weakness in technology stocks and relative underperformance in SPX and COMP. We should also watch RUT, which climbed to its highest level in 2½ years last week, to see if it can tack on follow-through gains. Another potential wrench in the works is the yield on 10-year Treasury notes. If the value investors are going to be rewarded, then that yield should hang around the 4.20% area or lower. If, for whatever reason, that yield climbs back into the 4.30% area or higher, then the new appetite for value could quickly fade.
This week will be the first full week of the second-quarter earnings season. Analysts expect that earnings this quarter will show about 9% year-over-year growth. That would mark the biggest increase since the first quarter of 2022. By comparison, the economic report calendar this week has much less potential to roil the markets.
| Economic Calendar (7/15/24 – 7/19/24) |
Previous |
Consensus |
|
| Monday 7/15/2024 | Empire State Manufacturing Index, July |
-6.0 |
-6.0 |
| Tuesday 7/16/2024 | Retail Sales, June, M/M |
+0.1% |
-0.2% |
| Retail Sales ex-Autos, June, M/M |
-0.1% |
+0.1% |
|
| Import Price Index, June, M/M |
-0.4% |
-0.1% |
|
| Business Inventories, May, M/M |
+0.3% |
+0.5% |
|
| Home Builder Confidence Index, July |
43 |
44 |
|
| Wednesday 7/17/2024 | Housing Starts, June, SAAR |
1.28mm |
1.30mm |
| Building Permits, June, SAAR |
1.39mm |
1.39mm |
|
| Industrial Production, June, M/M |
+0.9% |
+0.2% |
|
| Thursday 7/18/2024 | Initial Jobless Claims |
222K |
228K |
| Continuing Claims |
1,852K |
1,857K |
|
| Philadelphia Fed Manufacturing Survey, July, |
1.3 |
2.9 |
|
| U.S. Leading Economic Indicators, June, M/M |
-0.5% |
-0.3% |
|
| Friday 7/19/2024 | No reports scheduled |
|
|
Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Market Commentary/Market