Note: the commentary below was written after the close on Tuesday 7/30/2024. We added the last paragraph on Monday 8/5/2024 given the market movement since.
“Rotation is the lifeblood of a bull market” is a well-known stock market aphorism. We have seen a rotation in the last few weeks from mega cap tech stocks to previously out-of-favor areas of the market such as small cap stocks. The so-called Magnificent 7 tech stocks have declined 6.92% for July through 7/30, while the small cap Russell 2000 index rose 10.63%, according to data from Morningstar. Such a rotation, with performance broadening to more areas of the market, is a positive sign going forward according to our process.
The apparent catalyst for this rotation is a change in interest rate expectations. Triggered by a soft inflation report on July 10th, the market’s expectation for the first Federal Reserve rate cut have shifted to September. Smaller companies are more dependent on borrowing while larger companies can often fund their operations out of cash flow.
This rotation has brought about some market choppiness, with a rise in volatility and a small market dip from recent highs. Summer months often bring elevated volatility, and it is not unusual for there to be a pullback of some sort before the presidential election. However, the weight of the evidence firmly suggests that the market is on solid footing, and that any pullbacks should not be significant enough to concern long term investors.
8/5/2024 Addendum:
While we did not expect a decline to be this swift or immediate, a decline of some type over the summer is not surprising. Our indicators still suggest the market is healthy overall, and do not suggest significant additional downside. There may be more choppiness before a sustainable recovery begins; such frustrating periods serve to reset sentiment and set the stage for the next leg higher. According to Bespoke, the S&P 500 has opened down 3% or more (as it did today) 19 times in the last 30 years. The average result in next 3 months was +12.01%. Every future decline looks like risk. Every past decline looks like opportunity.
