A Major Market Reversal Has Likely Begun

seekingalpha07-12

A major market reversal may have just begun.We discuss what this major market reversal is and why it is likely to continue.We also share some of our top picks to profit from this trend. ...

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LaserLensYes","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"QQQ":"纳指100ETF","UWM":"罗素2000指数ETF两倍做多","ADC":"艾格里房产","SRTY":"罗素2000指数三倍做空ETF-ProShares","BX":"黑石","UPRO":"三倍做多标普500ETF","XLU":"公共事业指数ETF-SPDR","IWM":"罗素2000指数ETF","SH":"标普500反向ETF","AVB":"阿湾物产","IVV":"标普500指数ETF","CDUAF":"Canadian Utilities Ltd.","SSO":"两倍做多标普500ETF","MAA":"MAA房产信托",".SPX":"S&P 500 Index","WPC":"W. P. 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LaserLensYesterday's, July 11, CPI report and the resulting market reaction indicate that a major market reversal may have just begun. In this article, we will examine what this major market reversal is and why it is likely in its early stages. The Major Market Reversal We recently highlighted the fact that Peter Lynch saw enormous value among small-cap stocks and that we believed high-yield defensively positioned small-cap stocks provided a very rare buying opportunity before a big market reversal took place. In particular, we highlighted the potential for decelerating inflation and eventual Federal Reserve interest rate cuts as a primary catalyst that could unlock significant upside in small-cap stocks in a market rotation from favoring the mega-cap stocks to favoring smaller-cap stocks. The reason for this is that when interest rates are rising, smaller-cap stocks, especially more capital-intensive ones, tend to be perceived as much riskier and tend to see capital flow out of them. Large and mega-cap stocks, which have strong balance sheets and more stable, capital-light business models, tend to outperform. With yesterday’s inflation reading, it appears increasingly likely that the Federal Reserve will cut rates this year, and potentially as soon as September, as the market is currently pricing in about an 80% chance that the Fed will cut by 25 basis points in September. This market rotation was on full display yesterday. The mega-cap-heavy S&P 500 (SPY) was down by 0.88% and the mega-cap-heavy NASDAQ (QQQ) was down by 1.95%. In contrast, the Russell 2000 (IWM) was up by a whopping 3.59%. On top of that, several high-yield sectors were also up a good bit, as the Vanguard Real Estate Index Fund ETF (VNQ) was up by 2.87%, the Utilities Select Sector SPDR Fund ETF (XLU) was up by 1.83%, and alternative asset bellwether Blackstone (BX) was up by 1.89%. With this sort of dramatic rotation going on after an extended period in which mega-cap stocks seemed unstoppable in their march higher while defensive high-yield and small-cap stocks floundered, the tide may have finally begun to turn yesterday. Why The Major Market Reversal Has Likely Begun In fact, looking through the tea leaves of the inflation report, it appears that, other than housing and auto insurance, inflation is largely under control. Moreover, housing should be coming down as well as there is a significant lag there, and based on data points from rental rates among numerous landlord REITs like Camden Property Trust (CPT), Mid-America Apartment Communities (MAA), AvalonBay (AVB), and others, there is clearly pressure on housing costs that is preventing them from rising meaningfully, if not beginning to fall in some places. On top of that, the economy is clearly weakening, with unemployment now at 4% and likely to move higher, the yield curve remains sharply inverted, the jobs market is weakening, consumer sentiment and consumer spending are also weakening, and several key trade partners, including Europe and China, are also dealing with significant economic issues. Several central banks, such as the European Central Bank and the Bank of Canada, are now cutting rates. This all points to the Fed likely cutting rates in the near term. At the same time, an economic downturn also poses a headwind for more growth-oriented small-cap stocks, as a weak economy will likely hurt them as well as large-cap stocks, and potentially even more so. As a result, we believe that overweighting defensive small-cap stocks is a great place to be invested right now. In particular, we like triple net lease REITs like Agree Realty Corporation (ADC) and W. P. Carey (WPC) (though it is a mid-cap stock rather than a small-cap stock). We also like utilities, as we have recently discussed, and we think that ATCO (OTCPK:ACLLF) is a compelling under-the-radar opportunity in that space, as it provides discount exposure to Canadian utilities (OTCPK:CDUAF). We also like infrastructure plays like Brookfield Infrastructure Partners (BIP)(BIPC), which offers a very attractive yield and strong growth rate potential and should benefit from the rotation back into real assets like utilities and real estate. Investor Takeaway While anything can happen in the near term, and we do think that it is important to remain properly diversified because it is extremely hard to properly time the market and predict what is going to happen over short periods, we think that yesterday, at the very least, was a warning shot that a major market reversal is about to start and could very well be the beginning of a major capital rotation that is, frankly, long overdue. On top of that, the broader stock market is overvalued by just about every major valuation model that there is, and this is entirely due to the massive bull market in AI-related mega-cap stocks like Microsoft (MSFT) and NVIDIA (NVDA). As a result, investors who care about valuations and fundamentals should view the rich valuations of the major indexes and mega-cap stocks, combined with the potential catalyst of falling inflation and rate cuts that will likely follow, as a signal that it is important to allocate significant capital to the high-yield, defensive small and mid-cap space before the train leaves the station and these stocks get bid back up, causing some incredibly compelling opportunities to disappear.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2450586377"}