MW Stocks wobble after rotation from Big Tech leaves broadened rally in question
By Christine Idzelis
Is the U.S. stock market's summer rally still on?
U.S. stocks are wobbling after a recent rally beyond Big Tech, with volatility up after investors dumped shares of giant companies that dominate the S&P 500 index in favor of other areas of the equities market.
The S&P 500 SPX fell Friday for a third straight day, closing at its lowest value since the start of July, according to Dow Jones Market Data.
The shift away from shares of the so-called Magnificent Seven, a group of massive companies also known as Big Tech, into interest-rate sensitive stocks accelerated after a cooler-than-expected inflation report on July 11, according to a Yardeni Research note dated July 18.
Signs of easing inflation boosted investors' confidence that the Federal Reserve may start lowering interest rates in September, sparking a rotation into small-cap stocks and sectors such as financials, real estate, utilities, industrials and materials, the Yardeni note shows.
For the bull market in U.S. stocks to keep broadening, investors probably need to see more economic data of the kind that recently drove a "huge surge" in small-caps, according to Liz Ann Sonders, chief investment strategist at Charles Schwab.
Whether the rally still "has legs" likely will hinge on investors seeing more "tame inflation data reinforcing that the Fed can move to easier monetary policy as soon as maybe September," Sonders said in a phone interview. But the recent "extreme outperformance" for small-caps probably won't persist, she said.
The U.S. stock market closed lower Friday, with the S&P 500 logging its worst week since April as its information-technology sector dropped 5.1%.
Shares of artificial-intelligence chip-maker Nvidia Corp. $(NVDA)$, a tech giant with a market value of around $3 trillion, finished Friday with a weekly loss of about 8.8%. The Roundhill Magnificent Seven ETF MAGS - which holds Nvidia, Apple Inc. $(AAPL)$, Microsoft Corp. $(MSFT)$, Google parent Alphabet Inc. $(GOOGL)$, Amazon.com Inc. $(AMZN)$, Tesla Inc. $(TSLA)$ and Meta Platforms Inc. (META) - saw a 4.8% weekly drop.
Yardeni cited the Roundhill Magnificent Seven ETF in the chart below, tracking its performance from July 10 through July 18 relative to other parts of the U.S. stock market, including mid-cap and small-cap equites. For example, the chart lists sectors in the S&P MidCap 400 MID and S&P Small Cap 600 SML indexes, as well as the S&P 500, which measures large-cap stocks.
U.S. small-cap stocks in the financial sector posted the biggest gains over the period tracked in the chart above, while the Roundhill Magnificent Seven ETF saw the biggest losses.
Scott Wren, senior global market strategist at Wells Fargo Investment Institute, said by phone he's overweight U.S. large-cap stocks, viewing the recent rotation into small as temporary. "We're still underweight small-cap," he said. In his view, it's too soon to rotate into small-cap equities as the economy still is slowing into what he thinks will be "soft landing."
"I don't think you're going to have a recession, but you're going to have a slowdown," Wren said.
This coming week investors will get an estimate on U.S. economic growth in the second quarter, with the Bureau of Economic Analysis scheduled to release its estimate of gross domestic product during that period on July 25. And a reading on inflation in June from the Fed's preferred gauge, the personal-consumption-expenditures price index, is due out on July 26.
Inflation has been "normalizing" while the labor market is "cooling," said Lindsay Rosner, head of multisector fixed-income investing at Goldman Sachs Asset Management, by phone. "We feel that it is highly likely that the Fed will cut" its benchmark interest-rate in September, she said.
Meanwhile, U.S. stock-market volatility has jumped in the past week.
The Cboe Volatility Index VIX rose to 16.52 on Friday, finishing the week 32.6% higher, according to FactSet data. That marked its biggest weekly increase since March 2023.
Still, the Cboe Volatility index - known as the stock market's fear gauge - ended Friday below its long-term average of around 20.
Uncertainty surrounding the U.S. presidential election may also be stirring some investor anxiety, as stock and bond valuations will need to be evaluated with consideration of the policies of the winner, according to Rosner. Heading into the weekend, questions still were swirling around whether President Joe Biden would be the Democratic nominee for the November election, although the Associated Press reported Friday that Biden insisted he would return to the campaign trail.
Read: Dow drops as Wall Street weighs the odds of Biden leaving the White House race
"This is a good time to have bonds in your portfolio," said Rosner, pointing to the "gift" of relatively high yields and the role fixed income may have in weathering volatility.
The S&P 500 remains up 15.4% so far this year after closing Friday at 5,505. That's 2.9% below its record high close on July 16, according to Dow Jones Market Data.
The index has rallied 33.7% from its 52-week low on Oct. 27. After such a bullish run, the S&P 500 was "bound to cough up" some gains, said Wren.
The stock market tends to see a 10% pullback on average about every 10 and a half months or so, according to Wren. That means predictions for such a correction aren't "a bold call," he said, explaining the S&P 500 hasn't seen a 10% drawdown since rallying from its October low.
While the S&P 500 and technology-heavy Nasdaq Composite COMP each fell last week, the blue-chip stock index Dow Jones Industrial Average DJIA booked a third straight week of gains. The Russell 2000 index RUT, which focuses on small-cap stocks in the U.S., booked a 1.7% weekly rise.
Investors are "taking a breath, assessing where we are," said Rosner. "The soft-landing narrative is very much in play."
-Christine Idzelis
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(END) Dow Jones Newswires
July 21, 2024 12:01 ET (16:01 GMT)
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