Like passengers on a bus spinning around as the driver loses control, investors were left dizzy by the market rotation of this past week.
On the surface, it looked like investors had decided to take profits in what had worked, and rebalance elsewhere. The tech-heavy
dropped 3.7%, led by declines in
Nvidia
,
and much of Big Tech, while the
also fell, finishing the week down 2%. The
however, rose 0.7%, lifted by underperformers such as
and financials like
while the small-cap
jumped 1.7%. Both had been laggards until July.
The moves reflect ongoing optimism that the Federal Reserve will begin cutting interest rates in September—markets are pricing in a 95% chance of a cut, according to CME FedWatch—as lower inflation and weaker jobs data suggest it’s time to ease monetary policy. The market may also be responding to higher odds of a Red Sweep following the assassination attempt on former President Donald Trump; big GOP wins could bring lower taxes, reduced regulations, and other policies favorable to companies.
By the end of the week, though, it was unclear just how broad—or sustainable—the rotation would be. The Dow finished with two consecutive daily declines, while 273 stocks in the S&P 500 finished higher, narrowly outpacing the 227 losers in the index.
Thankfully, it isn’t a question investors need to answer right now. Just look at the Russell 2000. The small-cap index gained 11.5% over the five trading days ended July 16, nearly 10 percentage points more than the S&P 500 during that period, the largest five-day gap between the two since at least 1986.
Just as important, nearly 80% of the index’s stocks had hit new 20-day highs by Thursday, according to Renaissance Macro Research. Historically, that has also been great news for large-caps, with the S&P 500 gaining about 10% over the six months after at least 70% of Russell 2000 stocks hit new highs.
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One possible interpretation of the past week is that the economy is set to rebound. That would boost the nontech sectors of the market and offset weakness in tech stocks, says Jeff Buchbinder, chief equity strategist at LPL Financial. “If cyclical value works while tech is selling off, they are meaningful weights that can blunt the impact on the S&P 500,” he says, referring to consumer, financial, manufacturing, and commodities stocks.
Of course, the selloff in tech might simply be what happens when one group of stocks gets too extended, too crowded, and too popular—they drop. But it doesn’t mean the sector’s gains are over. If earnings at smaller, more economically sensitive stocks falter, Nvidia,
Apple
,
and the rest of tech could reclaim leadership, pushing the S&P 500 even higher.
We’re not ready to pick a side just yet, but then again, we don’t need to. The best advice is extremely simple: Just stay in the market.
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Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
