weekly market update 7/12/2024

"Elevated inflation is not the only risk we face."
~ Jerome Powell during testimony to Senate Banking Committee ~

Stocks and bonds rallied on the week, as market implied odds for an interest rate cut in September surged to almost 95%.  Last week saw the unemployment rate rise to 4.1% and this week we received a consumer price index (CPI) report that showed the first monthly inflation decline in over four years and the lowest 12-month rate of inflation in more than three years.  As a result, during his two-day congressional testimony Fed Chairman Jerome Powell subtly moved the central bank closer to lowering rates and markets cheered.  Next week, the beginning of the second quarter earnings season ramps up with results from Bank of America, Netflix, and the largest homebuilder in the nation D.R. Horton.

MARKET BROADENING

Throughout the second quarter we highlighted how a small number of mega cap stocks known as the Magnificent 7 were generating the lion’s share of S&P 500 returns, but this week we saw signs of that trend reversing.  Spurred by interest rate cut expectations, this week’s market action was hallmarked by a huge rotation out of the Magnificent 7 into the S&P 493 (S&P 500 ex-Mag7) and small-cap stocks.  For example, the small-cap Russell 2000 index outperformed the S&P 500 on Thursday by nearly 450 basis points (4.5%), the largest single-day gap since November 2008.  Furthermore, while the S&P 500 rose 0.9% on the week, the average S&P 500 stock rose over 3%.  To be clear, these areas that benefited are still lagging, but UBS noted that when markets experience one-day rotations like we saw on Thursday, the trend tends to continue for the following four weeks.

Ian G. Browning, CFA
Managing Director, Investment Strategies | Shareholder

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