What happened last week
- Equity Market Reversion: Small-caps outperformed mega-cap technology by a little less than 6% as year-to-date laggards continued their string of outperformance.
- Strong Retail Sales Data: The market rotation was turbocharged by a stronger-than-expected retail sales print.
- Biden Bows Out: Over the weekend, in a not-so-surprising move following growing backlash from key Democrats, Biden withdrew from the election.
What we’re watching this week
- U.S. Politics: Investor reaction to Biden’s withdrawal from the Democratic ticket and his endorsement of Vice President Kamala Harris are top of mind.
- Earnings: Mega-cap earnings this week will preview the deluge of reports next week.
- Data: 2Q GDP to update growth data; PMIs and a read on the Fed’s preferred inflation gauge, PCE, will round out the busy week ahead.
Horizon’s Investment Management Views
The volatility we highlighted in the prior note was evident in spades last week. Investors digested rapid-fire political news, better economic data, Fed messaging, and corporate earnings. In times of information overload, positioning tends to become more important, and that looked to be the case last week. Equities continued their recent rotation from the leaders into laggards; the S&P 500 fell almost 2% while small-caps rallied over 2%. Meanwhile, the NASDAQ 100 declined almost 4% on the week, its worst weekly fall since April. Foreign stocks did not benefit from the rotation away from U.S. mega-caps. Broad developed and emerging markets underperformed U.S. large-caps last week; the lack of concrete policy action as China’s Third Plenum policy meeting concluded likely contributed.
After two wild weeks in the market, the positioning shakeout is likely close to ending. We do not currently view the “broadening out” (stocks ex-Mag 7) trade favorably. However, we see pockets of opportunity in more beaten-down parts of the equity market. If economic data, like last weeks’ retail sales report, continues to rebound following the recent soft patch, cyclical and small-cap sentiment could continue to improve. Fed messaging around a cut in September could also be a tailwind. The next few weeks are big for the top of the market, too; earnings reports must justify their high multiples.
Over the weekend, President Biden withdrew from the election. Many had assumed this was happening already; we are awaiting the investor reactions and the first read on what comes next for the Democrats. This week, we get a first look at mega-cap tech earnings (Google and Telsa) and many industrial and materials names. Switching to economic data, we get a read on second-quarter GDP in the U.S., PMI surveys for major developed economies, and the Fed’s preferred inflation gauge – all important releases for sentiment around the recent equity rotation.
The Standard and Poor’s 500, or simply the S&P 500, is a stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States. The Nasdaq-100 is a stock market index made up of equity securities issued by 100 of the largest non-financial companies listed on the Nasdaq stock exchange. Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period. The Purchasing Managers’ Index (PMI) is an indicator of the prevailing direction of economic trends in the manufacturing and service sectors. Personal consumption expenditures (PCE), also known as consumer spending, is a measure of the spending on goods and services by people of the United States. The Magnificent 7 (Mag-7) stocks are a group of influential companies in the U.S. stock market: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla.
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