The S&P 500 index posted a two week win streak on Friday. Its torrid run has seen it notching gains in 10 out of 12 weeks dating back to the end of April. Remarks by Federal Reserve chair Jerome Powell on Capitol Hill hinting at interest rate cuts, along with a June consumer price index report that came in softer than expected, were the primary drivers of this week’s advance. For the week, the S&P added 0.9%, while the Nasdaq gained 0.2% and Dow climbed 1.6%.
US inflation cooled broadly in June to the slowest pace since 2021 on the back of a long awaited slowdown in housing costs. The core consumer price index (which excludes food and energy costs) climbed 0.1% from May, the smallest advance in three years. Overall, year over year CPI fell to 3% from 3.3% last month.
At the meeting with the Senate this week, the Fed indicated that it is definitely inching closer to cutting rates due to the “considerable progress” that has been made in taming inflation. More importantly, the Fed Chair declared that “reducing policy restraint too late or too little could unduly weaken economic activity and employment.”
We now have an interest rate cut in September.
Future Wealth’s View
As soon as the Fed Chair finished his speech, a rotation out of mega cap technology stocks into interest rate sensitive sectors such as real estate and small caps began on Wall Street. More importantly, small and mid caps that have struggled all year began to rally as large cap technology stocks began to sell off.
The first companies to report Q2 results thsi week were the banks and it was not pretty. Wells Fargo sank 6% for its worst earnings day drop in more than three years after a net interest income miss. Citigroup slumped 1.8% on expenses even though its revenue beat expectations. And JPMorgan fell 1.2% after its results and steady guidance failed to impress.
As much as the first half was predictable – large cap technology stocks – NVidia, Microsoft et al ruled the day, the second half of 2024 promises to be a lot more challenging. While the breadth gained from appreciation in small cap and mid cap stocks could provide the much needed diversification in one’s portfolio, it could be a worrisome if there is sell off in large cap tech stocks that shifts into small and mid cap stocks. We, at Future Wealth LLC, would be looking to see if the $6 trillion sitting in money market funds makes its way into equities rather than a shift away from large cap to small and mid caps.
Only time will tell.