By Rick Schwerd | July 26, 2024
Our investment team remains committed to sharing updates and market insights to keep you informed. Please look for our next update on August 9.
Volatility Hits Stocks
Wednesday’s sell-off was the worst one-day return in nearly two years for the S&P 500 and NASDAQ, as investors moved away from first-half winners. The return of volatility is not all that surprising. After a strong run in June and early July, large-cap stock valuations had become a bit stretched, so any perceived bad news was likely to cause an oversized reaction. Second-quarter earnings have been coming in pretty good, but future guidance from companies has been a bit disappointing. Mid-summer through early October also tends to be a slow period for stock returns.
Pivot Toward Small Caps
In our last update, we mentioned that there was a recent pivot away from large-cap stocks and into small caps. This has continued dramatically over the last two weeks. The S&P 500 was down as much as 4.9 percent from recent highs, and the tech-heavy NASDAQ was down as much as 8.8 percent. However, over the last month, the small-cap Russell 2000 index is up 11.6 percent.
There are several reasons for the rotation out of large-cap and into small caps. Better inflation data and some slower economic data has significantly increased the odds that the Federal Reserve will begin cutting rates in September. Small-cap stocks are much more interest-rate sensitive than their large-cap peers. There is also some simple “reversion to the mean” happening as well. Even with impressive recent outperformance of small caps, over the last year the NASDAQ index is outperforming the small-cap Russell 2000 index by over 9 percent. The dispersion of returns is a good reminder of why we stress a diversified portfolio.
Overall, we are not overly concerned by the recent volatility and do not believe it is the start of new bear market. Corrections during a bull market can be healthy, as they remove some of the froth and can help broaden the overall rally. Stocks could certainly have some further downside over the near term as short-term moves in equity markets are hard to predict. However, with the Fed likely to begin cutting rates, the secular tailwind of artificial intelligence and post-election clarity, there are several positive factors to help support stocks as we move into the later part of the year.
Better Than Expected GDP Data
Second-quarter GDP came in at 2.8 percent, beating expectations that were running in the 2-percent range. This was an improvement over the 1.4 percent growth we saw in the first quarter. Much of the increase appears to be driven by a bounce back in two categories: inventories and consumer spending on goods. We do not think that GDP growth was significantly different between the two quarters, and prefer to look at it as approximately 2 percent solid growth during the first half. We do expect softer, yet positive GDP growth for the remaining two quarters of the year.
Looking Ahead
I’m sure most people will be focused on enjoying the beautiful weather we expect this weekend here in upstate New York. However, we will be eagerly anticipating the Federal Reserve meeting next week. We do not expect them to make any changes to rates at that time, but they are likely to lay the groundwork for a cut at their next meeting in September. We will also see the continuation of second-quarter earnings season, as Apple, Microsoft, Amazon, Exxon Mobile and several others will report earnings next week. Finally, the July jobs report will be released next Friday, where we expect approximately 200,000 new jobs and the unemployment rate to remain at 4.1 percent.
As always, if you have any questions or concerns regarding markets or your financial planning needs, please reach out to us at (518) 415-4401.
About the Author: With almost three decades of financial industry experience, Rick serves as a Senior Investment Officer at Glens Falls National Bank. He oversees individual and corporate retirement plans, personal trusts, investment management accounts, foundations and not-for-profit relationships. He is also co-portfolio manager of the proprietary North Country Large Cap Equity Fund.