It’s only been seven days since our last update, but wow, it has been a wild week. This week has seen a wide array of events, including the assassination attempt on Donald Trump, a dramatic market rotation, a global computer outage caused by a software update, and ever-louder whispers that President Biden may drop out of the race by the end of the weekend. It has been quite some time since there has been a week with this much action.
Starting with the mindblowing news Saturday evening that Donald Trump came within an inch of certain death, it was an event that no one will forget. Regardless of one’s political beliefs, this can only be described as a horrific security failure where the outcome, which tragically took the life of one man, could have been much worse. If there is a possible silver lining, we can only hope this event will help to reign in the political vitriol on both sides of the aisle.
While significant events like Saturday can sometimes roil markets, the front half of the week saw no ill effects. In fact, the week started with a continuation of the trends seen at the end of the prior week. And we’re seeing a historic rotation in equities, from the Mega-Cap Tech stocks that led the first half of the year into many smaller names that lagged considerably.
In the first half of the year, the disparity between the S&P 500 and its equal-weight counterpart was over 13 percentage points. Again, this is a function of the fact that the ten largest companies contributed almost all the gain in the year’s first half. Interestingly, a spread of this magnitude has only happened 11 times since 1990, and they all occurred from December 1999 to March 2000, during the height of the Dot-com bubble.
Similarly, the rally in small-cap equities has been nothing short of exceptional. In just five trading days ending July 17, the Russell 2000 rose 9.2%. At the same time, the tech-heavy Nasdaq-100 dropped 4.2% over the same period. The relative performance disparity between the two indices was the third widest on record. Again, the previous two instances were in late 2000 and early 2001, during the Dot-com bubble.
Moving from market rotation to market disruption, many woke on Friday morning to hear about a massive software issue that stemmed from a bad software update issued by cybersecurity firm CrowdStrike (CRWD). The botched update impacted airlines, banks, and others running Windows products. The impact on air travel alone was massive, with over 2,000 flights canceled and more than 5,000 flights delayed. Not surprisingly, CrowdStrike stock is taking it on the chin, down -12% mid-day.
Finally, as we approach the thick of the presidential political season, we are still wondering who the Democratic nominee will be. Strong rumors are circulating from those close to President Biden that he is resigned to mounting pressure that may push him to exit the race. And with more than 30 Democratic members of Congress calling for his exit, the public pressure continues to grow. So, while a change looks ever more likely, the subsequent uncertainty lies in who will replace him.
If this week reminds us of anything, it’s that markets, politics, and life in general are unpredictable. But through it all, an underlying resiliency allows us to persevere. The economy is more than any single company, and the nation is more than any one politician. Even though it was a truly wild week, this too shall pass.
Economy
- Markets were mostly lower this week after an incredibly strong start to the year. The S&P 500 was down -2.0%, the Nasdaq was down -3.6%, and the small-cap Russell 2000 was up 1.7%.
- U.S. weekly unemployment claims rose by 10K to 243K for the period ending July 13, surpassing market expectations of 230K.
- Total outstanding claims increased by 20K to 1,867K on the week ending July 6. This is the highest level in over six years, excluding the COVID period.
Stocks
- U.S. equities were in negative territory. Technology and Consumer Discretionary led the decline, while Energy and Real Estate outperformed. Value stocks led growth stocks, and small caps beat large caps.
- International equities closed lower for the week. Developed markets fared better than emerging markets.
Bonds
- The 10-year Treasury bond yield increased five basis points to 4.24% during the week.
- U.S. bond markets were in negative territory this week, while International bond markets were positive.
- High-yield bonds led for the week, followed by government bonds and corporate bonds.
