Last week, financial markets experienced a rare and significant event: simultaneous selloffs across multiple asset classes. Oil, gold, stocks, and bonds all declined, driving the Bloomberg Commodities Index to its lowest point since March. Such synchronised declines are unusual but not unprecedented. This event was noteworthy because it happened for a second consecutive session. Should it occur for a third straight day, it would be exceptional but not necessarily indicative of long-term trouble.
Despite the potential for a third synchronised decline on Monday, the broader outlook isn’t bleak. Last week, the S&P 500 experienced a 2% drop, its steepest since April, primarily driven by a botched Microsoft Windows update that disrupted global systems. Semiconductor stocks, influenced by geopolitical tensions and a pivot towards small caps, are at a critical juncture.
Stocks vs. Rates: The major indexes saw mixed results last week. The S&P 500 and Nasdaq closed lower, while the Dow gained, highlighting a rotation in market leadership. The relationship between stocks and interest rates has evolved, with recent weeks showing a divergence as rates declined and stocks continued to rise, driven by expectations of a Fed rate cut and sustained economic growth. A “soft landing” scenario with moderating inflation and easing Fed policy is increasingly priced into the markets. While this supports a positive outlook, upcoming inflation data could introduce volatility.
Mega-cap Tech vs. the Broad Market: The S&P 500’s performance has been heavily influenced by the “Magnificent 7” tech giants. However, last week saw a shift, with the S&P 500 equal-weight index outperforming, indicating broader market participation. While mega-cap tech remains strong, the rotation into cyclical sectors like financials, industrials, and energy suggests a more balanced market leadership going forward. Earnings growth outside the top tech firms is expected to accelerate, supporting this trend.
Small-caps vs. Large-caps: Small-cap stocks saw a resurgence last week, reflecting growing confidence in a Fed rate cut, a resilient economy, and favourable election-related policies. This shift highlights the potential for more cyclical, economically sensitive sectors to take the lead, driven by continued economic expansion and supportive monetary policy.
S&P 500: The index slid about 2% for the week, marking its sharpest decline since April. The dip was exacerbated by a global IT outage affecting Microsoft Windows systems, highlighting the vulnerability of markets to technological disruptions.
Dow Jones Industrial Average: The Dow, less exposed to tech, managed a modest gain, briefly surpassing 41,000 for the first time and extending its weekly winning streak to three. This divergence underscores the rotation away from tech-heavy indexes.
Nasdaq Composite: Heavily weighted towards tech, the Nasdaq suffered due to the underperformance of major semiconductor stocks and ongoing geopolitical tensions, particularly around U.S.-China trade relations. The VanEck Semiconductor ETF (SMH) fell 6.7% amid trade restrictions on China and a global IT outage, hitting key bearish technical signals.
In the past four decades, fewer than 400 days have seen the S&P 500, Russell 2000, oil, and gold all fall while the yield on 10-year Treasuries rose, accounting for only 3.9% of the time. Consecutive two-day declines have occurred just five times (0.5%), and three-day streaks a mere three times (0.03%). These rare occurrences typically coincided with pivotal monetary policy shifts, such as September 2023, March 2017, and February 1985. However, the current pattern does not appear tied to any significant policy changes, making it an anomaly worth noting but not necessarily alarming.
Technology Sector: After a strong start to the year, tech stocks, particularly semiconductors, faced pressure. The Biden administration’s potential imposition of severe trade restrictions on China weighed heavily on the sector.
Cyclical Sectors: Financials, industrials, and energy sectors outperformed, benefiting from rising corporate earnings and expectations of a Fed rate cut. This rotation signals a potential shift in market leadership from tech to more economically sensitive sectors.
Swiss Market Resurgence: The Swiss stock market is staging a notable comeback, driven by investor demand for stability amid global political and economic uncertainties. Since April, the Swiss Market Index (SMI) has outperformed other major indexes, trailing only the S&P 500 with an 11% gain this year. The defensive nature of Swiss stocks, with significant exposure to healthcare and consumer staples, has made them attractive as macroeconomic disappointments pile up in the U.S., Europe, and China. Additionally, the Swiss National Bank’s early rate cuts and the resultant weaker franc have boosted the competitiveness of Swiss companies. Despite not being cheap, Swiss equities are increasingly viewed as a strategic allocation, particularly in the context of ongoing global instability and the potential return of more volatility in international markets.
Looking Ahead, investors should brace for potential market volatility in the short term, particularly with critical economic data releases on the horizon. However, prevailing trends indicate a supportive environment for equities. Diversification and balanced portfolios will be crucial for navigating the shifting market landscape. The anticipated Fed rate cut, robust corporate earnings, and economic resilience point to a promising outlook for the weeks ahead.
Federal Reserve Meeting: The next Fed meeting is highly anticipated, with many expecting a potential rate cut in September. Any deviation from this expectation could significantly impact market stability.
Inflation Data: With inflation currently moderating, the upcoming CPI and PPI reports will be pivotal. Any unexpected rise in inflation could challenge the current narrative of easing price pressures and supportive Fed policy.
Earnings Reports: As earnings season progresses, results from major corporations, especially in the tech and financial sectors, will offer valuable insights into corporate health and future market direction.
Geopolitical Developments: Ongoing trade tensions, particularly between the U.S. and China, will continue to play a crucial role in market sentiment.
Investors should stay vigilant for any new policy announcements or trade restrictions.
Overall, while short-term fluctuations are likely, broader economic indicators suggest a favourable environment for informed and adaptive investors. Monitoring economic indicators and policy developments will be essential for capitalising on market opportunities and mitigating risks.
