Transcript

Great Rotation? · ANGLES.

0:01
SPEAKER_00: Great rotation.
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SPEAKER_00: My weekly market review, July 21st, 2024.
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SPEAKER_00: Despite the politically consequential events in Pennsylvania the weekend before,
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SPEAKER_00: the assassination attempt appeared not to have been that much of a game changer on
0:16
SPEAKER_00: Wall Street since a Trump victory in November had been pretty much assumed already
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SPEAKER_00: and was then simply priced in more strongly than ever over the course of the week.
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SPEAKER_00: But there were plenty of other factors in play during what ended up being a wild few days.
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SPEAKER_00: Wall Street didn't miss a beat and picked up on Monday right where it had left off the previous Friday.
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SPEAKER_00: Gains across the board on the back of interest rate cut optimism,
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SPEAKER_00: but most notably in 2024's forgotten mid and small cap world for the third
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SPEAKER_00: consecutive day of a noticeable widening in the breadth of the rally as
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SPEAKER_00: market-driven predicted most likely number of 2024 interest rate cuts moved up from
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SPEAKER_00: two to three.
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SPEAKER_00: Interestingly,
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SPEAKER_00: traditional beneficiaries of Republican governance,
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SPEAKER_00: such as old school oil producers,
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SPEAKER_00: regional banks and gun related companies,
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SPEAKER_00: were among the leaders,
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SPEAKER_00: while likely Republican punching bags like BlackRock,
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SPEAKER_00: United Health Group,
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SPEAKER_00: Green Energy and emerging market stocks did far less well.
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SPEAKER_00: On Tuesday,
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SPEAKER_00: a surprisingly hot pre-market retail sales print,
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SPEAKER_00: which showed an increase in June versus the expectation of a decrease,
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SPEAKER_00: was thrown into the mix,
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SPEAKER_00: as was the announcement of Trump's running mate,
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SPEAKER_00: J.D.
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SPEAKER_00: Vance,
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SPEAKER_00: who has in the past publicly called for the breakup of Google,
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SPEAKER_00: vocally opposes American support for Ukraine against Russia,
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SPEAKER_00: and who bizarrely just claimed that the UK was the world's first Islamist country
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SPEAKER_00: with a nuclear weapon.
1:52
SPEAKER_00: After a strong start in the same vein as the last few trading days,
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SPEAKER_00: large cap stocks began to show some signs of exhaustion during the afternoon session,
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SPEAKER_00: with the tech sector again taking the day off.
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SPEAKER_00: But small caps kept up their epic rally as what was already becoming dubbed the
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SPEAKER_00: great rotation out of larger tech-related names and into smaller,
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SPEAKER_00: more consumer-related names,
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SPEAKER_00: continued in anticipation of the broadening of the rally as interest rate cuts
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SPEAKER_00: finally begin in September,
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SPEAKER_00: which is now considered pretty much a certainty.
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SPEAKER_00: But then things took a sudden and very nasty turn on Wednesday.
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SPEAKER_00: tech in general and chip and ai related stocks in particular were taken behind the
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SPEAKER_00: woodshed on the back of the idea that the us is floating the floating the idea of
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SPEAKER_00: tougher trade curves with china and concerns surrounding a likely trump vance
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SPEAKER_00: approach
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SPEAKER_00: to international trade,
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SPEAKER_00: fueled also by a growing sense that the whole AI hype thing could just have got
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SPEAKER_00: ahead of itself,
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SPEAKER_00: with some high-profile stocks simply being overpriced as a result.
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SPEAKER_00: Stock indexes plunged,
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SPEAKER_00: but the rotation trade still persisted as the smaller cap indexes fell much less
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SPEAKER_00: hard than those with a high mega cap tech allocation,
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SPEAKER_00: which took a real beating.
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SPEAKER_00: The Nasdaq index suffered its worst daily nosedive since late 2022,
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SPEAKER_00: and perhaps ominously,
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SPEAKER_00: the usual dip buyers were notable only by their absence.
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SPEAKER_00: On Wednesday evening,
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SPEAKER_00: in his convention speech,
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SPEAKER_00: Vance took on the populist attack dog role right away and promptly took aim at
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SPEAKER_00: financial markets,
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SPEAKER_00: saying that a Republican administration will not cater to Wall Street and its
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SPEAKER_00: barons who crash the economy.
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SPEAKER_00: presumably some kind of reference to 2008 and the great financial crisis.
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SPEAKER_00: He also pledged to stop the Chinese Communist Party from building their middle
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SPEAKER_00: class on the backs of American citizens.
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SPEAKER_00: The European Central Bank kept interest rates unchanged on Thursday morning,
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SPEAKER_00: but warned of multiple risks to economic growth in the eurozone.
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SPEAKER_00: US stocks appeared initially to have at least stopped Wednesday's severe bleeding,
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SPEAKER_00: but once it became clear that there was still no sign of the cavalry,
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SPEAKER_00: In the form of the extensive rebound-producing buying of the dip that has
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SPEAKER_00: accompanied all recent sharp declines,
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SPEAKER_00: stock prices sank substantially further across the board,
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SPEAKER_00: resulting in a second consecutive rotten day,
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SPEAKER_00: with even the great rotation trade losing steam.
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SPEAKER_00: America woke up to a global tech outage on Friday caused by a botched CrowdStrike
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SPEAKER_00: update to Microsoft systems.
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SPEAKER_00: Exchanges around the world were only lightly impacted and the broad stock sell-off
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SPEAKER_00: swiftly resumed when US markets opened and only intensified as the session went on
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SPEAKER_00: with CrowdStrike stock prices especially punished.
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SPEAKER_00: There was still no sign of the dip buying cavalry as mega cap tech stock prices
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SPEAKER_00: struggled to find a floor.
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SPEAKER_00: In the five trading days following July 11th,
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SPEAKER_00: the Russell 2000 small cap value index soared by 8% at the same time as the large
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SPEAKER_00: cap tech stock index slumped by 5.5%.
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SPEAKER_00: The 2024 performance gap between the NASDAQ and the Russell 2000 small cap index
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SPEAKER_00: shrank from 20% to 10% over the same time period.
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SPEAKER_00: It was the largest one-week small cap outperformance of large cap in history.
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SPEAKER_00: Traders appear to be taking a lot of chips,
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SPEAKER_00: pun intended,
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SPEAKER_00: off the table ahead of the beginning of mega cap tech earnings this week,
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SPEAKER_00: not to mention the release of big GDP and inflation data.
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SPEAKER_00: It could just take one big earnings miss or one negative headline from a highly
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SPEAKER_00: weighted company to take the major indexes down even further.
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SPEAKER_00: Conversely,
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SPEAKER_00: a spectacular rebound from these lower prices could also be on the cards if the
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SPEAKER_00: earnings news is impressive and the dip buyers return en masse.
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SPEAKER_00: Let's buckle up.