Despite the politically consequential events in Pennsylvania the weekend before, the assassination attempt appeared not to have been that much of a game-changer on Wall Street since a Trump victory in November had been pretty much assumed already and was then simply priced in more strongly than ever over the course of the week. But there were plenty of other factors in play during what ended up being quite a wild few days.
Wall Street didn’t miss a beat and picked up on Monday right where it had left off the previous Friday; gains across the board on the back of interest rate cut optimism - but most notably in 2024’s forgotten Mid and Small Cap world, for the third consecutive day of a noticeable widening in the breadth of the rally as the market-driven predicted most likely number of 2024 interest rate cuts moved up from two to three.
Interestingly, traditional beneficiaries of Republican governance such as old school oil producers, regional banks and gun-related companies were among the leaders while likely Republican punching bags like Blackrock (BLK), UnitedHealth Group (UNH), green energy and emerging market stocks did far less well.
On Tuesday a surprisingly hot pre-market Retail Sales print, which showed an increase in June vs. the expectation of a decrease, was thrown into the mix as was the announcement of Trump’s running mate choice, J.D. Vance, who has in the past publicly called for the breakup of Google, vocally opposes American support for Ukraine against Russia and who bizarrely just claimed that the UK was the world’s first Islamist country with a nuclear weapon.
After a strong start in the same vein as the last few trading days, Large Cap stocks began to show some signs of exhaustion during the afternoon session with the tech sector again taking the day off, but Small Caps kept up their epic rally as what was already becoming dubbed the “Great Rotation” out of larger, tech-related names and into smaller, more consumer-related names continued in anticipation of the broadening of the rally as interest rate cuts finally begin in September (now considered pretty much a certainty - see FEDWATCH INTEREST RATE TOOL below).
But things took a sudden and very nasty turn on Wednesday. Tech in general and chip and AI-related stocks in particular were taken behind the woodshed on the back of the idea that the U.S. is floating the notion of tougher trade curbs with China and concerns surrounding a likely Trump/Vance approach to international trade, fueled also by a growing sense that the whole AI hype thing could just have got ahead of itself with some high profile stocks being simply overpriced as a result.
Stock indexes plunged - but the rotation trade still persisted as the smaller cap indexes fell much less hard than those with a high Mega Cap Tech allocation which took a real beating. The NASDAQ index suffered its worst daily nose-dive since late 2022 and, perhaps ominously, the usual dip-buyers were notable only by their absence.
On Wednesday evening, in his convention speech, Vance took on the populist attack-dog role right away and promptly took aim at financial markets, saying that a Republican administration “will not cater to Wall Street” and its “barons” who “crashed the economy”, presumably some kind of reference to 2008 and the Great Financial Crisis. He also pledged to “stop the Chinese Communist Party from building their middle class on the backs of American citizens.”
The European Central Bank kept interest rates unchanged on Thursday morning but warned of multiple risks to economic growth in the Eurozone. U.S. stocks appeared initially to have at least stopped Wednesday’s severe bleeding, but once it became clear that there was still no sign of the cavalry in the form of the extensive, rebound-producing “buying of the dip” that has accompanied all recent sharp declines, stock prices sank substantially further across the board resulting in a second consecutive rotten day, with even the Great Rotation trade losing steam.
America woke up to a global tech outage on Friday caused by a botched Crowdstrike update to Microsoft systems. Exchanges around the world were only lightly impacted and the broad stock sell-off swiftly resumed when U.S. markets opened and only intensified as the session went on, with Crowdstrike’s stock price (CRWD) especially punished. There was still no sign of the dip-buying cavalry as Mega Cap Tech stock prices struggled to find a floor.
In the five trading days following July 11th, the Russell 2000 Small Cap Value Index soared by 8% at the same time as the Large Cap tech stock index slumped by 5.5%. The 2024 performance gap between the NASDAQ and the Russell 2000 Small Cap index shrank from 20% to 10% over the same time period. It was the largest one-week Small Cap outperformance of Large Cap in history.
Traders appear to be taking a lot of chips (pun intended) off the table ahead of the beginning of Mega Cap Tech earnings this week, not to mention the release of big GDP and inflation data (see THIS WEEK’S UPCOMING CALENDAR below). It could take just one big earnings miss or one negative headline from a highly weighted company to take the major indexes down even further. Conversely, a spectacular rebound from these lower prices could also be on the cards if the earnings news is impressive and the dip buyers return en masse.
Let’s buckle up!
OTHER NEWS ..
Foreign Buyers Fleeing The U.S. .. It’s not just Americans who can’t afford U.S. homes. International purchases hit a record low as foreign buyers balked at the dollar’s strength and a dearth of available US properties. Non-U.S. citizens bought 54,300 previously-owned homes in the country in the twelve months through March, a 36% decline from the same period a year before.
Purchases were constrained in part by the same inventory shortage that’s challenged domestic house hunters in recent years. Owners clinging to pandemic-era cheap mortgages are keeping thousands of potential listings off the market, and that’s driving up prices for properties that are available.
Soccer Chaos Ahead Of 2026 World Cup .. The Copa America soccer final between Argentina and Colombia in Miami last weekend was supposed to be a showcase dress rehearsal for North America’s upcoming hosting of what is by far the world’s biggest sporting event, the 2026 World Cup. Instead, it descended into embarrassing chaos with video footage showing mostly Colombian fans storming the gates before kickoff and ultimately being allowed in to the stadium by overwhelmed stewards. Many of these fans were ticketless and consequently some ticket-holders who had paid many thousands of dollars for tickets and travel failed to get into the game at all and ended up watching it on a big screen in the parking lot.
The tournament organizers were also criticized for failing to provide adequate security protection for the players’ families, some of whom appeared to come under attack from rival fans, leading to some players jumping into the stands and fighting with supporters.
Not a good look just two years out from the event.
ARTICLE OF THE WEEK ..
You can now use your workplace retirement plan as an ATM for emergencies of up to $1k a year.
THIS WEEK’S UPCOMING CALENDAR ..
Q2 earnings season will continue to be investors' main focus this week with about a quarter of the companies in the S&P 500 scheduled to release, including Alphabet/Google, Tesla, Verizon, UPS, AT&T, Honeywell, SAP, NXP Semiconductors, Unilever, General Motors, Coca-Cola, Visa, Comcast, 3M, Lockheed Martin, NextEra Energy, American Airlines, Southwest Airlines, Newmont, Chubb, Las Vegas Sands and Chipotle.
On Thursday we will get the first estimate (of three) for Q2 Gross Domestic Product (GDP) The consensus estimate is for an annualized U.S. growth rate of 1.9%, versus a final number of 1.4% in Q1.
The Fed relies heavily on the Personal Consumption Expenditures (PCE) price index for its inflation estimate and consequent interest rate policy and the latest data comes out on Friday. Expectations are for a 2.4% year-over-year inflation rate, down from 2.6% the previous month.
LAST WEEK BY THE NUMBERS ..
Last week’s market color courtesy of finviz.com
Last week’s best performing U.S. sector: Energy (two biggest holdings: Exxon-Mobil, Chevron) - up 2.1% for the week.
Last week’s worst performing U.S. sector: Technology (two biggest holdings: Microsoft, Nvidia) - down 5.4% for the week.
SECTOR DASHBOARD:
Sector Dashboard courtesy of The Sevens Report, data valid as of early last week.
SPY, the S&P 500 Large Cap ETF, tracks the S&P 500 index, made up of 500 stocks from among the largest U.S. companies. Its price fell 2.0% last week, is up 15.5% so far this year and ended the week 2.8% below its all-time record closing high (07/16/2024).
IWM, the Russell 2000 Small Cap ETF, tracks the Russell 2000 index, made up of the bottom two-thirds in terms of company size of a group made up from among 3,000 largest U.S. stocks. Its price rose 1.7% last week, is up 8.0% so far this year and ended the week 10.6% below its all-time record closing high (11/08/2021).
AVERAGE 30-YEAR FIXED MORTGAGE RATE ..
6.77%
One week ago: 6.89%, one month ago: 6.87%, one year ago: 6.82%
Data courtesy of: FRED Economic Data, St. Louis Fed as of last Thursday.
FEAR & GREED INDEX ..
“Be fearful when others are greedy and be greedy when others are fearful.” Warren Buffet.
The Fear & Greed Index from CNN Business can be used as an attempt to gauge whether or not stocks are fairly priced and to determine the mood of the market. It is a compilation of seven of the most important indicators that measure different aspects of stock market behavior. They are: market momentum, stock price strength, stock price breadth, put and call option ratio, junk bond demand, market volatility and safe haven demand.
Extreme Fear readings can lead to potential opportunities as investors may have driven prices “too low” from a possibly excessive risk-off negative sentiment.
Extreme Greed readings can be associated with possibly too-frothy prices and a sense of “FOMO” with investors chasing rallies in an excessively risk-on environment . This overcrowded positioning leaves the market potentially vulnerable to a sharp downward reversal at some point.
A “sweet spot” is considered to be in the lower-to-mid “Greed” zone.
Data courtesy of CNN Business as of Friday’s market close.
FEDWATCH INTEREST RATE TOOL ..
Will interest rates be lower than they are now after the Fed’s meeting on July 31st?
Yes .. 5% probability (7% a week ago)
No .. 95% probability (93% a week ago)
Will interest rates be lower than they are now after the Fed’s following meeting on September 18th?
Yes .. 97% probability (94% a week ago)
No .. 3% probability (6% a week ago)
Where is the Fed Funds interest rate most likely to be at the end of 2024?
4.625% (0.75% lower than where we are now, implying three rate cuts before the end of 2024)
One week ago: 4.875% (implying two rate cuts), one month ago: 4.875% (implying two rate cuts)
All data based on the Fed Funds rate (currently 5.375%). Calculated from Federal Funds futures prices as of the market close on Friday. Data courtesy of CME FedWatch Tool.
The 50-day moving average of the S&P 500 remains above the 200-day. This is a continued indication of an ongoing technical uptrend.
% OF S&P 500 STOCKS TRADING ABOVE THEIR 50-DAY MOVING AVERAGE:
64% (319 of the S&P 500 stocks ended last week above their 50D MA and 181 were below)
One week ago: 69%, one month ago: 48%, one year ago: 80%
% OF S&P 500 STOCKS TRADING ABOVE THEIR 200-DAY MOVING AVERAGE:
73% (362 of the S&P 500 stocks ended last week above their 200D MA and 138 were below)
One week ago: 72%, one month ago: 66%, one year ago: 70%
Closely-watched measures of market breadth and participation, providing a real-time look at how many of the S&P 500 index stocks are trending higher or lower, as defined by whether the stock price is above or below their more sensitive 50-day (short term) and less sensitive 200-day (long term) moving averages which are among the most widely-followed of all stock market technical indicators.
The higher the reading, the better the deemed health of the overall market trend, with 50% considered to be a key pivot point. Readings above 90% or below 15% are extremely rare.
WEEKLY US INVESTOR SENTIMENT (outlook for the upcoming 6 months) ..
↑Bullish: 53% (49% a week ago)
⬌ Neutral: 24% (29% a week ago)
↓Bearish: 23% (22% a week ago)
Net Bull-Bear spread: ↑Bullish by 30 (Bullish by 27 a week ago)
For context: Long term averages: Bullish: 38% — Neutral: 32% — Bearish: 30% — Net Bull-Bear spread: Bullish by 8
Survey participants are typically polled during the first half of the week.
Data courtesy of: American Association of Individual Investors (AAII).
HIGH YIELD CREDIT SPREAD ..
3.09%
One week ago: 3.18%, one month ago: 3.24%, one year ago: 3.90%
This closely-watched spread is a strong indicator of the risk inherent in the professional marketplace and the extent to which such risk is growing or easing. The high-yield credit spread is the difference between the interest rates offered for riskier low-grade, high yield (“junk”) bonds and those for stable high-grade, lower yield bonds, including deemed risk-free government bonds, of similar maturity.
A reading that is high/increasing indicates that “junkier” bond issuers are being forced to move their yields higher to compensate for a greater risk of default and is considered to be a reflection of broadly deteriorating economic and market conditions which could well lead to lower stock prices.
A reading that is low/decreasing indicates a reduced necessity for higher yields. This reflects less prevailing market risk and more stable or improving conditions in the overall economy and for stock prices.
For context .. this reading was regularly below 3.00% for much of the 1990s, got as high as 10.59% after 9/11 and the subsequent Dotcom Crash of 2002, peaked at 21.82% in the Great Financial Crisis in December 2008 and spiked from 3.62% to 10.87% in the space of about a month during the February/March 2020 COVID crash. The historical average since 1996 is a little over 4.00%.
Data courtesy of: FRED Economic Data, St. Louis Fed as of Friday’s market close.
US TREASURY INTEREST RATE YIELD CURVE ..
The highest rate on the yield curve (5.52%) is being paid for the 2-month duration and the lowest rate (4.16%) is for the 5-year.
The most closely-watched and commonly-used comparative measure of the spread between the higher 2-year and the lower 10-year fell from 0.27% to 0.24%, indicating a flattening in the inversion of the curve last week.
The interest rate yield curve remains unusually “inverted” (i.e. shorter term interest rates are generally higher than longer term ones). Based on the 2-year vs. 10-year spread, the curve has been inverted since July 2022.
Historically, an inverted yield curve is not the norm and has been regarded by many as a leading indicator of an impending recession, with shorter term risk regarded to be unusually higher than longer term. The steeper the inversion, the greater the deemed risk of recession.
Data courtesy of ustreasuryyieldcurve.com as of Friday. The lightly shaded area on the chart shows the current Federal Funds rate range.
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