“The point of investing, after all, is not to have a great story to tell; the point of investing is to make money with limited risk.”
– Seth Klarman
While we do not make big, declarative statements on the markets, we see the market action in July as a possible turning point for the markets. Equity indexes were up across the board with all the indexes we follow producing positive gains. What we have taken note of is that small-caps, mid-caps, and the Dow Industrials all handily outperformed the S&P 500. At the same time, the Bloomberg Aggregate Bond Index rallied 2.32% this month on lower bond yields. Commodities and the US Dollar index were both negative.
All data as of 08/01/2024, Source: Wells Fargo Investment Institute. An index is not managed and not available for direct investment. Past performance is not a guarantee of future results. [Wells Fargo Investment Institute, Inc. is a registered investment advisor and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.]
If you look at the above chart with the monthly and year-to-date return for the stock market indexes without any additional context it is easy to be bullish. What’s not to like? Returns have been really good for the first seven months of 2024. Unfortunately, the stock market doesn’t perform in a vacuum unattached to what is happening in the world. And right now, a lot is happening in the world and inside the markets.
Chart #1 is a year-to-date chart for the S&P 500. On the surface, this looks like an orderly, low-volatility move higher. However, in our opinion, this nice-looking chart is masking what we believe is a much bigger story happening below the surface of the major market indexes.
The tell occurred on Wednesday, July 24th when the S&P 500 dropped more than 2% for the first decline of more than 2% in 356 trading days. In our experience, selloffs like this tend to be a broad-based weakness in all sectors. What happened was quite unexpected – 165 stocks (about 1/3 of the index’s constituents) were positive for the day with the weakness primarily attributed to the largest technology stocks in the index.
Chart #1: www.stockcharts.com Data 01/01/24 – 07/31/24 as of 08/05/24. An index is not managed and not available for direct investment. MA 50 = 50-day moving average MA 200= 200-day moving average. Past performance is not a guarantee of future results.
Charts #2, #3, and #4 show what has been happening to the stocks inside the S&P500 index. Utilities and Healthcare – two sectors that have lagged the S&P 500 the past few years – continued to move higher in the last week of July as the S&P 500 moved sideways and technology weakened. One or two weeks do not make a shift in market trend, but we are very much open to the possibility that a change in leadership from the growth sectors to the more value sectors has started.
Chart #2: www.stockcharts.com Data 01/01/24 – 07/31/24 as of 08/05/24. An index is not managed and not available for direct investment. MA 50 = 50-day moving average MA 200= 200-day moving average. Past performance is not a guarantee of future results.
Chart #3: www.stockcharts.com Data 01/01/24 – 07/31/24 as of 08/05/24. An index is not managed and not available for direct investment. MA 50 = 50-day moving average MA 200= 200-day moving average. Past performance is not a guarantee of future results.
Chart #4: www.stockcharts.com Data 01/01/24 – 07/31/24 as of 08/05/24. An index is not managed and not available for direct investment. MA 50 = 50-day moving average MA 200= 200-day moving average. Past performance is not a guarantee of future results.
Interest Rates
At the start of 2024, the bond market was pricing in six short-term interest rate cuts from the Federal Reserve Bank (The Fed). The prevailing thought at that time was the combination of inflation trending lower and towards the 2% level Chairman Powell has viewed as an appropriate level and a predicted economic slowdown would lead to swift action on rates. The Fed, it was believed, would get out in front of an economic slowdown. As of publication in early August, 2024, the economy appears to be softening but remains positive. Short-term interest rates remain where they were at the start of the year.
Recent data, however, indicates a significant deceleration in inflation, reducing the urgency for high interest rates to curb price increases. Concurrently, economic growth forecasts again suggest a potential slowdown, prompting the Fed to consider rate cuts to stimulate economic activity and prevent a recession. Additionally, with inflation under control, the Fed’s focus is likely to shift towards its mandate of maximizing employment, which could involve lowering rates to foster job creation and economic stability. These factors collectively point towards a possible strategic adjustment in monetary policy to navigate the evolving economic landscape.
The rapid change in sentiment has led interest rates lower at what we consider to be an accelerated pace. The 10-year US Treasury Bond yield, when was 4.34% on June 28th ended the month at 4.14% and was below 3.80% on August 5th.
Chart #5: www.stockcharts.com Data 08/04/22 – 08/05/24 as of 08/05/24. An index is not managed and not available for direct investment. MA 50 = 50-day moving average MA 200= 200-day moving average. Past performance is not a guarantee of future results.
Looking Ahead
As previously stated, we believe expectations of Federal Reserve interest rate policy changes are currently exerting a significant influence on the U.S. stock market. Investors are closely monitoring signals from the Fed regarding potential rate cuts, particularly in light of recent data indicating cooling inflation and a softening job market. The anticipation of lower interest rates has led to increased market volatility, as traders adjust their positions in response to evolving economic indicators and Fed communications. We are seeing a rotation away from growth sectors such as technology – particularly the largest companies in the space – into less cyclical areas such as consumer staples, healthcare, and utilities.
We also need to respect the market realities of presidential election years. Typically, in the months leading up to the presidential election, the market often experiences increased volatility due to the uncertainty surrounding the election outcome and potential policy changes. Investors closely monitor candidates’ platforms and potential impacts on various sectors, leading to heightened market sensitivity to political developments.
At Magellan Financial we remain positive on the markets going forward but expect a challenging environment in the coming months.
Final Thoughts
An important component of successful investing is perspective. The stock market doesn’t move in a straight line and corrections happen regularly. Stock market volatility is a normal and expected aspect of financial markets. Historically, most years witness several corrections, with the market typically experiencing multiple 5% pullbacks and at least one 10% correction annually. These fluctuations are driven by a variety of factors, including economic data releases, geopolitical events, and changes in investor sentiment.
The challenge you face as an investor is to continue to keep your perspective and focus on what matters. You invest not to have a great story but to meet your long-term financial goals and needs. In our experience, those who get overly concerned about their investments during volatile times should have a review of their wealth plan to make sure they are on track to successfully meet their goals.
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On behalf of Magellan Financial, we would like to thank you for taking the time out of your busy day to take in our thoughts and opinions. If you found this helpful, please forward it to others. If you have any questions on the materials presented, would like to be added to our email list, or would like our help with your investments, we can be contacted at 610-437-5650 or via email.
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.All investing involves risks including the possible loss of principal invested. Past performance is not a guarantee of future results.
Index returns are not fund returns. An index is unmanaged and not available for investment.
Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted index of 30 “blue-chip” industrial U.S. stocks.
S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock’s weight in the Index proportionate to its market value.
S&P Midcap 400 Index: The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between the S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
S&P Small-Cap 600 Index: The S&P SmallCap 600 Index consists of 600 domestic stocks chosen for market size, liquidity (bid-asked spread, ownership, share turnover and number of no trade days) and industry group representation. It is a market value-weighted index (stock price times the number of shares outstanding), with each stock’s weight in the index proportionate to its market value.
MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.
MSCI World Index: The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.
MSCI EAFE® Index: The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada.
MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.
The CRB (Commodity Research Bureau) Index measures the overall direction of commodity sectors. The CRB was designed to isolate and reveal the directional movement of prices in overall commodities trades.
Bloomberg Barclays U.S. Aggregate Bond Index: Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based measure of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
NASDAQ Composite Index: The NASDAQ Composite Index measures the market value of all domestic and foreign common stocks, representing a wide array of more than 5,000 companies, listed on the NASDAQ Stock Market.
Russell 2000® Index: The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents.
U.S. Dollar Index (USDX) measures the value of the U.S. dollar relative to majority of its most significant trading partners. The index is similar to other trade-weighted indexes, which also use the exchange rates from the same major currencies.
Technical analysis is only one form of analysis. Investors should also consider the merits of Fundamental and Quantitative analysis when making investment decision. Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility.
Investments in fixed-income securities are subject to market, interest rate, credit and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the bond’s price. Credit risk is the risk that the issuer will default on payments of interest and/or principal. The risk is heightened in lower rate bonds. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.
Investing in commodities is not suitable for all investors. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The prices of various commodities may fluctuate based on numerous factors including changes in supply and demand relationships, weather and acts of nature, agricultural conditions, international trade conditions, fiscal monetary and exchange control programs, domestic and foreign political and economic events and policies, and changes in interest rates or sectors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks, including futures roll yield risk.
Robert I. Cahill, Partner Rob.Cahill@wfafinet.
Jonathan D. Soden, Managing Partner Jon.Soden@wfafinet.com
Robert Sweeney, Financial Advisor Bob.Sweeney@wfafinet.com
Jay Knight, Senior Account Administrator Jay.Knight@wfafinet.com