The political implications of the July 13 assassination attempt on former President Donald Trump dominated U.S. financial markets last week. The market priced in an Election Day victory for the Republican Party. Several market sectors, including financial services, industrials and energy, were projected to be the beneficiaries of a second Trump administration’s “America first” trade policies and relaxed government regulations.
This reaction may have been premature, particularly given President Joseph Biden’s decision to drop out of the race on Sunday. We are now in uncharted territory and the presidential election will take on a new dynamic.
The Great Rotation
In any event, last week the equity markets were dominated by the “great rotation” as investors booked profits in technology names that have performed extremely well since the stock market lows in October 2022, such as Amazon, Meta, Google and Microsoft. In turn, institutional investors were pouring money into value stocks and small caps which had been missing the rally in the S&P 500 Index so far this year. From July 9 to close of business on July 17, the Russell 2000 index of small company stocks was up 10.35%, while the Nasdaq was down 2.37% – a huge small cap outperformance of 12.72% (Source: CNBC).
This turn of events prompts a couple of questions. Is this frenetic rebalancing action the start of the new trend? Will the rest of the market finally catch up with the performance of the U.S. Mega Cap technology companies? We are concerned that this move was more about extreme positioning, and that small caps will eventually resume their financial struggle against high interest rates, expensive labor costs and lingering inflation pressures.
On Thursday the selling pressure on technology names continued. Plus, emerging signs of potential economic weakness (including increasing initial unemployment claims) led to a broad decline in equities. Every major industry group in the S&P 500 fell on the day’s trading. This general sell-off happened despite increasing conviction by market participants that the Federal Reserve is moving closer to reducing interest rates after keeping them elevated for more than a year.
A Tech Reminder
As we were preparing to close the week hoping to find some stabilization and support for technology stocks, many people started their day by staring at a “blue screen of death” on their computer screens. An unprecedented tech outage, caused by a major cybersecurity company’s flawed software update, affected Microsoft applications and left many businesses across the globe struggling to operate.
This is a stark reminder of humanity’s extreme dependence on technology. The tech-heavy Nasdaq market is suffering through one of its many periods of high volatility, but the tech outage clearly shows the need for computing and technology services will only continue to grow.
This week we will be looking for signs that the market correction is running its course, but it will probably be a volatile week for financial markets. We also will learn how the markets react to the changes in the race for the White House.
Mega Cap companies such Apple, Microsoft and Amazon will not report earnings until next week, meaning investors will have to wait to hear their outlooks for the second half of the year. Meanwhile, the fixed income market will continue to handicap the timing of the next Fed move. Could the Federal Open Markets Committee meeting early next week create a market moving surprise? We’ll be watching.
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