.jpg "From Rotation to Rolling Over Photo")
Over the past month, the hyper-concentrated, large-cap growth-driven stock market finally rotated to the more undervalued areas of the market — namely small-cap stocks and traditional value sectors like financials and utilities. This next phase of the bull market showed much greater market breadth and, at least for a few brief moments, gave a respite for forlorn value investors.
However, last week, the market rotation quickly turned to a market that rolled over. Tepid earnings reports from the biggest, large-cap companies — Alphabet (Google), Microsoft and Amazon — combined with a weaker-than-expected jobs report sent global financial markets reeling.1 Stocks posted one of their worst declines of 2024,2 and U.S. Treasuries rallied dramatically — sending interest rates down sharply.3 While the Federal Reserve (Fed) met this past week and held rates steady,4 financial markets have clearly spoken — and they are saying that the Fed is behind the curve and will be expected to cut short-term rates by a lot more than anyone expected just a few short days ago.
The market’s focus will now shift from concerns of a spreading financial crisis and worries of inflation to fears of a pending recession. Several indicators — the bull steepening of the yield curve, the potential triggering of the Sahm Rule (signals a recession when the three-month moving average of the national unemployment rate rises by 0.5 percentage points or more, relative to its low during the previous 12 months) and a loss of market momentum — are all factors that have led investors to seek safety in U.S. Treasury bonds and historically safer utility stocks.5,6
As of this morning, fear is spreading. The Japanese stock market crashed in a decline reminiscent of 1987.7 The Volatility Index (VIX) spiked to over 60, a level only seen during the depths of Covid-19 and the Great Financial Crisis.8 As investors, we need to constantly be aware of market shifts and their impact on our portfolios. The past few years since the pandemic have been historically unprecedented, and the future does not appear that it will be any easier to read as several major, potential risks lie ahead.
Sources:
1Investor’s Business Daily – Stock Market Takes Bearish Turn; Apple, Microsoft, Meta, Amazon, AMD In Focus: Weekly Review; 8/2/24
2Charlie Bilello
3,8Bloomberg
4Board of Governors of the Federal Reserve System – Federal Reserve issues FOMC statement; 7/31/24
5CNBC – Job growth totals 114,000 in July, much less than expected, as unemployment rate rises to 4.3%; 8/2/24
6Financial Times – Surging AI power demand boosts utility stocks; 8/4/24
7Reuters – US yields slide as traders bet on big Fed rate cuts after weak data; 8/5/24
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