The stock market is about to take you on a wilder ride than a mechanical bull with a caffeine addiction. Remember that childhood game of musical chairs? Well, the music just stopped, and big tech is the one left standing… awkwardly. But fear not, for the underdogs are having their moment in the sun (or should we say, the market spotlight?). Inflation’s been throwing some curveballs, and the Fed’s about to switch gears. So, grab a metaphorical bag of popcorn, folks, because we’re about to see a battle royale between bulls and bears, with interest rates as the ultimate prize. Will this be a boom for forgotten sectors, or just a blip on the radar? Let’s dive in and find out!
TL;DR
- Cooling inflation is leading investors to expect interest rate cuts from the Fed.
- This is causing a rotation away from big tech stocks and towards industrials and small caps.
- The market is in flux, and investors need to adapt their strategies.
Ah, the stock market! Just when you think you have it all figured out, it throws you a curveball. Recently, cooling inflation sparked a wild rotation in the stock market. Investors, with their ever-fickle hearts, decided to trim their bets on big tech leaders and piled into the underdogs – the industrials and small caps. Let’s break it down, shall we?
Inflation Eases: Cue the Market Shuffle
On a recent Thursday, data revealed that price pressures are easing. This nugget of information deepened the market’s confidence that the Federal Reserve would start cutting interest rates in September. The growing certainty of rate cuts drove government bond yields lower and triggered a mad dash into the market’s beaten-down corners that could benefit from falling rates.
Transitioning to specifics, the Russell 2000 index of small-cap stocks, which was flat for 2024 just days ago, soared 3.6% in its best day since November. Real estate, the S&P 500’s worst-performing sector this year, jumped 2.7%. Utilities and industrials groups also enjoyed gains of 1.8% and 1.3%, respectively. Quite the turnaround, wouldn’t you say?
Big Tech Takes a Tumble
While small caps were basking in glory, the mega-sized tech stocks, which have been the market’s darlings, took a nosedive. The so-called Magnificent Seven collectively lost a whopping $597.5 billion in market value, marking their largest one-day loss since February 2022. Ouch!
Chip maker Nvidia slid 5.6%, Facebook parent Meta Platforms declined 4.1%, and the tech giants – Google parent Alphabet, Amazon.com, Apple, and Microsoft – each dropped more than 2%. Tesla, in a dramatic twist, retreated 8.4% after Bloomberg News reported the company was postponing its robotaxi unveiling. Talk about a plot twist!
The Market’s Largest Stocks Push the S&P 500 Down
Thanks to the declines of the market’s largest stocks, the S&P 500 ended its streak of six record closes, dropping 0.9%. The tech-heavy Nasdaq Composite had its worst day since April, retreating 2%. In contrast, the Dow Jones Industrial Average, which doesn’t include all the big tech stocks, rose 0.1%, or about 32 points. A tiny victory amid the chaos.
In a dramatic divergence within the market, the Russell 2000 notched its biggest one-day lead over the Nasdaq Composite in data going back to 1986. Small companies, which tend to issue more floating-rate debt than their larger peers, are especially sensitive to changes in interest rates. Hence, the bond market responded immediately to the new inflation data, with the yield on the benchmark 10-year U.S. Treasury note dropping to 4.192% from Wednesday’s 4.280%.
Small Caps Rally
Small-cap stocks rallied across the market. Victoria’s Secret gained 6.1%, Outback Steakhouse owner Bloomin’ Brands rose 7.1%, and motor-home company Winnebago Industries added 6.7%. Within the large-cap world of the S&P 500, home builders D.R. Horton and Lennar advanced 7.3% and 6.9%, respectively. Deere shares gained 2.9%, and Public Storage shares rallied 3.2%.
Investors Find a Silver Lining
Despite the decline in big tech stocks, some investors found reason to cheer the shift in leadership. Many have fretted that the market’s reliance on a handful of tech stocks leaves the rally vulnerable. As Jamie Cox, managing partner for Harris Financial Group, aptly put it, “Rotation is the lifeblood of a bull market. This is great news.”
Currently, the S&P 500 is up 17% in 2024, while the Nasdaq Composite is up 22%. Not too shabby, considering the turbulence.
Inflation Data: A Catalyst for Change
The market rotation was kick-started by data showing U.S. inflation eased significantly in June. The consumer-price index rose 3% from a year earlier, slightly less than economists had forecast. This easing inflation bolstered investors’ view that the Fed would pivot to lowering rates at its September meeting.
Adding to this, Fed Chair Jerome Powell laid the groundwork for rate cuts by pointing to a cooling labor market and suggesting that further softening would be unwelcome. These developments reinforced the belief that the Fed would soon cut rates.
Earnings Season and Global Markets
Investors are now looking ahead to earnings season, which kicked off with reports from JPMorgan Chase, Wells Fargo, and Citigroup. Delta Air Lines shares fell 4% after reporting a sharply lower profit in the second quarter.
Overseas, stocks were broadly higher. The Stoxx Europe 600 added 0.6%, while Japan’s Nikkei 225 advanced 0.9% to close at another record. The consumer-price index, a measure of goods and services costs across the economy, fell slightly from May, dropping the year-over-year inflation rate to 3%, the lowest since June 2023.
Core Prices and the Broader Market
Core prices, excluding volatile food and energy items, rose 0.1% since May – the mildest increase since January 2021. This broad cooling of prices was a confidence booster for the Fed. The report showed that prices cooled broadly in the second quarter and were below economists’ expectations, a reverse from the first quarter when inflation was surprisingly brisk.
This news keeps the door wide open to a September interest-rate cut. Fed Chair Powell has laid the groundwork, suggesting the labor market is slowing in a way that diminishes a major source of inflation and risks further weakness that wouldn’t be desirable.
Investor Expectations and Fed Moves
Investors don’t expect the Fed to lower interest rates at its next meeting in late July. However, the bigger question for that meeting is how officials will lay the groundwork for a September cut. San Francisco Fed President Mary Daly hinted that rate cuts could be warranted soon but stopped short of endorsing a move at the July meeting.
Following the report, investors ramped up bets that the Fed would cut rates twice this year, with odds of a third cut climbing. This implies the central bank could lower rates at its last three meetings of the year, in September, November, and December.
Housing Costs and Inflation
Thursday’s report could be especially comforting to policymakers because it showed housing costs are slowing after a mammoth run-up following the pandemic. Housing inflation, reflecting the cost of renting and accounting for about one-third of the CPI, has kept overall prices high.
Economists and Fed officials have long anticipated that this inflation would ease. The latest report provided welcome confirmation that official inflation gauges are now capturing those developments.
Price Increases and Consumer Behavior
Price increases were generally subdued across various categories. The costs of air travel and hotel stays fell sharply from the previous month. U.S. airlines have been cutting ticket prices, reversing from a year ago when airlines strained to expand flying quickly enough to meet demand. Delta Air Lines CEO Ed Bastian noted that last summer, everyone was traveling, and prices didn’t matter. Now, airlines have added more than enough flights to accommodate record numbers of passengers, and fares have eased.
Inflation and Consumer Spending
While inflation has cooled notably over the past two years, many Americans haven’t taken much comfort from milder 12-month inflation readings because the run-up in prices since 2021 has been abnormally large. Executives at PepsiCo, which reported quarterly results recently, indicated that inflation-weary shoppers are cutting back.
Consumers who previously bought affordable treats like Doritos and Lay’s instead of splurging on restaurants, concerts, or travel are now limiting spending in all areas. Jamie Caulfield, PepsiCo’s CFO, said, “There is a cohort of consumers that have become more price conscious. They’re looking for more deals to get more for their money.”
Car Insurance and Lingering Inflation
Car insurance remains a hot spot for inflation, reflecting the lingering impact of previous car price increases. While car prices have recently come down, including in June, this has not yet fully alleviated inflation pressures in car insurance.
The Bigger Picture
Large tech stocks pulling the S&P 500 lower on Thursday reflects a broader enthusiasm about the inflation report among small and midsize companies. The Russell 2000, representing smaller businesses, posted a big gain. A Fed move to start cutting interest rates could be especially helpful to smaller businesses, which tend to have more floating-rate debt than larger companies.
U.S. Treasurys also saw a robust rally, driving yields lower. The yield on the benchmark 10-year Treasury note settled at 4.192%, down from 4.280% the previous day. Movements in yields broadly reflect investors’ expectations for short-term rates set by the Fed.
Fed’s Balancing Act
Heading into Thursday, signs of a cooling economy were not enough to stir recession fears but sufficient to prompt a change of tone from the Fed. Officials are trying to balance the risk of cutting rates too soon, allowing inflation to persist, with the risk of waiting too long and causing unnecessary damage to the job market.
Powell’s Perspective
In remarks to Congress, Fed Chair Jerome Powell acknowledged “considerable progress” in slowing inflation to the Fed’s 2% target but did not set a timeline for lowering interest rates. The central bank increased its benchmark rate most recently in July 2023 to around 5.3%, the highest level since 2001, to combat inflation that hit a 40-year high.
The White House’s Take
The White House welcomed Thursday’s news. President Biden has spent the week attempting to stop a stream of Democratic defections from his re-election support after a rough debate performance and public appearances that haven’t inspired confidence. Lowering inflation quickly could be his saving grace in the eyes of voters.
Recent Events Related to Market Rotation and Inflation
Cooling Inflation Data
- Event: U.S. inflation eased significantly in June 2024.
- Source: Reuters – U.S. Inflation Eases in June
Federal Reserve’s Interest Rate Policy
- Event: Increased confidence that the Federal Reserve would start cutting interest rates in September 2024.
- Source: Bloomberg – Fed Rate Cut Predictions
Market Rotation from Big Tech to Industrials and Small Caps
- Event: Investors trimmed bets on big tech leaders and moved into industrials and small caps following inflation data.
- Source: CNBC – Market Rotation into Industrials and Small Caps
Russell 2000 Index Performance
- Event: The Russell 2000 index of small-cap stocks surged 3.6% in one day.
- Source: MarketWatch – Russell 2000 Soars
Big Tech Stock Decline
- Event: The collective loss of $597.5 billion in market value by the Magnificent Seven tech stocks.
- Source: The Wall Street Journal – Big Tech Stock Decline
Nvidia and Tesla Stock Performance
- Event: Nvidia’s 5.6% decline and Tesla’s 8.4% drop after postponing its robotaxi unveiling.
- Source: Bloomberg – Nvidia and Tesla Stock Declines
Earnings Reports from Major Banks
- Event: JPMorgan Chase, Wells Fargo, and Citigroup kicked off earnings season with their reports.
- Source: Reuters – Major Banks Earnings Reports
Global Market Performance
- Event: Stoxx Europe 600 and Japan’s Nikkei 225 indices showed gains following U.S. inflation data.
- Source: Financial Times – Global Market Performance
These recent events illustrate the dynamics in the financial markets, influenced by macroeconomic indicators and corporate performance. The cooling inflation data has spurred expectations of imminent Federal Reserve interest rate cuts, leading to a market rotation from big tech stocks to industrials and small-cap stocks. The Russell 2000 index’s significant gain and the decline in big tech stocks such as Nvidia and Tesla underscore this shift. Additionally, the earnings season for major banks and the performance of global markets provide a broader context for understanding the market movements. These events collectively demonstrate how inflation trends and monetary policy expectations can drive substantial changes in investment strategies and market performance.
Is this market rotation a well-choreographed ballet of opportunity, or a chaotic game of hot potato? The truth, like most things in finance, probably lies somewhere in between. One thing’s for sure, though: the market’s a fickle beast, and keeping up with its latest tango takes both brains and bravado. Think you’ve got the moves? Head over to our “Investing” section for even more insights and analysis to help you navigate this whirlwind. Remember, in the game of investing, knowledge is always the best hedge!
