Olympic Rotation

1. More Market Rotation. Equity markets underwent further re-allocation last week, out of mega-cap tech and into styles, sectors, and industries that have lagged this year. The Russell 2000 was up over 3% in the week with the S&P 500 declining about 1%. Since the July CPI report, the RLV has outperformed the RLG and the gap between the two indexes has narrowed from 19% to 6.7% today.  This is a significant change in sector styles, and bears are watching. Also worth monitoring is fund flows – since July 11, non-tech ETFs have experienced $4.6 billion of inflows, with tech ETFs losing $1.2 billion in the same period.  

Investors are weighing many different factors at the moment with political uncertainty in the U.S. and economic data that has pushed forward rate cut timing. Earnings releases last week from Alphabet (GOOGL) and Tesla (TSLA), although positive overall, did not exceed their lofty expectations. Because of this, flows have transitioned into companies with cheaper valuations and better forward-looking comparisons.

Chart 1: Russell 2000 Outperforming the S&P 500 by 10% in July^[1]

Themes we have been discussing for quite some time this year (housing, energy infrastructure, financials) have seen strong performance recently, specifically D.R. Horton (DHI) which is up 25% this month alone. Truist Financial (TFC) is up 21% month-to-date and is a beneficiary of a steepening yield curve. TFC generates 70% of its total revenue from net interest income, which is likely to expand as short-term rates decline. With interest rates likely to fall throughout the second half of 2024, market participation will broaden away from technology as seen over the last few weeks. 

2. Further Signs for a Soft Landing. Economic data continues to come in favoring a soft landing for the U.S. economy – slowing inflation with stable growth. Preliminary second-quarter GDP data came in at an annualized rate of 2.8%, above the 2.1% forecast and double the first quarter reading of 1.4%. Equipment investment was up across the economy and prices paid were lower than expected. Companies continue to believe in the economic backdrop, investing in their businesses as inflation slows to a moderate pace.

Consumer spending remains healthy, up 2.3% y/y, along with the personal consumption expenditure (PCE) data for June coming in line with consensus at 2.5% y/y. Inflation is clearly slowing to the Fed’s 2% goal, with the labor market in balance and the economy growing at a solid rate. We do not think it’s the Fed will make a policy change at its July meeting this week but think it’s likely that they signal for a 25 bp cut at its September meeting.

3. Fixed Income. The Treasury curve bull steepened last week as investors priced in higher odds of a September fed rate cut. The 2-yr trended lower to end the week, down 12 bps to 4.38%, the lowest since February. The 10-yr ended the week 4 bps lower at 4.19%. The 2s10s inversion eased to -14 bps on Wednesday, the least inverted in two years (finished the week -19 bps). U.S. IG spreads widened by 2 bps to +129; YTD IG spreads have remained in the 115-129 bps range as demand has continued to be solid.

Net flows into Fixed Income ETFs increased 12% to $8.5bn w/w, more than 50% above the 13-week average. IG Corporate ETFs saw 18% greater inflows w/w, HY ETFs saw a 90% increase, & Muni ETFs saw a 30% increase. U.S. credit ratings improved last week as the main rating agencies issued 41 upgrades and 22 downgrades. Communications had the most upgrades, while Consumer Discretionary had the most downgrades. HY saw 22 upgrades versus 18 downgrades, while IG saw 16 upgrades versus 2 downgrades.

There is a busy week ahead as the Federal Reserve, Bank of Japan, and Bank of England will be taking center stage in policy decisions. For the fed, the market is currently pricing a 100% chance for September rate cut, 69% for a second cut in November, and a 65% chance for a third cut in December.

4. The 2024 Summer Olympics Begin. The 2024 Paris Summer Olympics officially kicked off last Friday! More than 10,500 athletes from 200 national teams will be competing for gold across 329 events lasting 19 days. Here are a few fun facts about the Olympics:

• For the first time in Olympic history, there will be an equal number of men and women competing this summer in Paris: 5,250 men and 5,250 women.
• This will be the third time Paris has hosted the Olympics. They previously hosted the second-ever modern Olympic games in 1900 and again in 1924. Paris and London are tied as the two cities to host the most Olympic games.
• The last time pure gold medals were produced was 1912. Today, gold medals are mostly made from silver and iron. If the 529-gram medal was pure gold, it would cost over $40,000.

5. The Week Ahead.

Earnings – Monday: FFIV, HOLX, MCD, ON, RVTY, SBAC; Tuesday: AMD, AEP, AMT, CZR, ECL, EA, FLSR, LYV, MRK, MSFT, PYPL, PFE, PSX, PG, SPGI, SWKS, SBUX, SYY, ZBRA; Wednesday: MO, CDW, COR, DAY, DD, EBAY, ETSY, FE, GRMN, GEHC, HUM, JCI, KKR, LRCX, MA, MTCH, META, MGM, QCOM, TMUS, BA, KHC; Thursday: AMZN, AAPL, APTV, BKNG, COP, CTVA, CMI, D, ETN, EXC, INTC, K, MCHP, MRNA, MSI, PWR, REGN, CLX, HSY, VRTX; Friday: LNT, CBOE, CE, CVX, XOM, PRU, REG, VTR.

Economics – Tuesday: FHFA Home Price Index, S&P/Case-Schiller Composite, Consumer Confidence, JOLTS Job Openings; Wednesday: Pending Home Sales, FOMC Meeting; Thursday: Unit Labor Costs, Second-Quarter Productivity, PMI Manufacturing, ISM Manufacturing; Friday: Hourly Earnings, Nonfarm Payrolls, Unemployment Rate, Durable Orders.

Stephanie Link’s TV Schedule:

Return for Selected Indices^[2]

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, as a member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC. This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors. All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice. This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

[1] Source: FactSet. As of July 26, 2024.

[2] Source: Bloomberg. As of July 29, 2024.