Greetings from Northern Michigan, where we’re lucky to be enjoying a fantastic time with family at the lake.
However, almost like clockwork, it seems like the market starts to act up whenever we take a few days out of the office. This week was no different, as the market rotation we discussed over the past few weeks continued. In addition to the financial news, the biggest story of the week has to be that President Biden dropped out of the race last Sunday. And while there was some initial speculation about who would replace him, that also seems to be settled.
While market volatility has picked up, we have to start with the week’s biggest news: President Biden dropping out of the race and Vice President Kamala Harris becoming the clear front-runner for the Democratic nomination. It was an intriguing process, as Biden issued a statement withdrawing from the race. However, his initial statement did not endorse Harris, leaving many wondering what would happen next.
We weren’t left wondering for too long as Biden followed up his announcement with another statement supporting Harris for president. This was quickly followed by many prominent Democrats, including the Clintons, Nancy Pelosi, and Chuck Schumer. But one family was noticeably quiet, at least until this morning.
Former President Barack Obama and former First Lady Michelle Obama officially endorsed Vice President Harris in her bid for the presidency. This endorsement marks a significant moment in the Democratic Party’s consolidation behind Harris as their presumptive nominee. The Obamas, two of the party’s most popular figures, were among the last key leaders to formally back Harris.
With this endorsement, Harris has secured backing from virtually all significant Democratic figures, her campaign has shown impressive fundraising momentum, and recent polls show a tight race against former President Trump. While the presidential race will be tightly contested, at least there is one less unknown now than last Sunday.
Moving to financial markets, the trend of the last two weeks of outperformance by small-cap stocks continued. Only a few company-specific news items impacted mega-cap tech, as Alphabet (GOOG) and Tesla (TSLA) had disappointing earnings. Beyond that, the shift to small caps appears to be driven by broader factors, including:
- Valuation: Some investors may view mega-cap tech stocks as overvalued after their recent strong performance.
- Profit-taking: After a significant rally in tech stocks earlier this year, investors are taking profits and reallocating their portfolios.
- Economic outlook: With inflation showing signs of moderation and expectations of potential interest rate cuts, investors are becoming more optimistic about broader economic growth and increased interest in sectors outside of tech.
- A.I. exuberance: There are growing worries that the excitement surrounding artificial intelligence might be reminiscent of the Dot-com bubble.
As always, it’s essential to maintain a diversified portfolio and not make knee-jerk reactions to short-term market movements or political developments. While the current shift is noteworthy, it’s crucial to consider it within the context of broader economic trends and individual investment goals.
Economy
- Markets were mixed again this week as the rotation continued for a third week. The S&P 500 was down -0.8%, the Nasdaq was down -2.5%, and the small-cap Russell 2000 was up 3.5%.
- The advanced GDP estimate showed that the U.S. economy expanded an annualized 2.8% in Q2, up from 1.4% in Q1 and above forecasts of 2%.
- U.S. core PCE prices, the Federal Reserve’s preferred gauge to measure underlying inflation, rose by 0.2% from the previous month, above market expectations of a 0.1% increase.
Stocks
- U.S. equities were in negative territory. Consumer Discretionary and Technology led the decline, while Utilities and Healthcare 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 decreased four basis points to 4.20% during the week.
- Global bond markets were in positive territory this week.
- High-yield bonds led for the week, followed by government bonds and corporate bonds.
