CWS Market Review – July 16, 2024

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Leadership Has Changed on Wall Street

On Thursday, the stock market closed higher for the 13th time in the last 15 sessions. The S&P 500 hit another new all-time high – (take it away, Rita!). This is our 37th new high this year, and we’re only at the All-Star break.

What’s most striking about this rally is that the market’s leadership has abruptly changed.

Technology stocks, especially large-cap tech, had been leading the charge while many value stocks, typically smaller industrial stocks, had been lagging behind. The gap between growth and value had gotten unreasonably large.

That all changed with last week’s inflation report. What happened is that the benign inflation news has apparently given the go-ahead to the Federal Reserve to start cutting interest rates in September. The Fed has been clear that it wasn’t going to cut rates until it saw more evidence that inflation is well-contained. That’s exactly what it got.

The important fact for investors is that lower rates change the risk profile of the stock market. Value stocks usually benefit as rates head downward.

The current stock market has become an either/or market. The two competing camps are best represented by the Russell 2000 Index of small-cap stocks on one hand, and the Nasdaq Composite on the other.

Each day, the stock market seems to greatly favor one of these indexes, and it hates the other. It’s like a giant, multi-trillion dollar game of tug-of-war. Before last week’s inflation report, the Nasdaq was on fire and the Russell 2000 couldn’t do anything right.

Since the inflation, everything has flipped. Check out this chart of the Russell 2000. It went nowhere for weeks, then suddenly, it lurched forward.

Here’s a chart that shows you how this has become an either/or market.

I made a scatterplot of the daily excess gain of the Nasdaq and the Russell 2000. By excess gain, I mean how much better or worse the index did compared with the S&P 500. The horizontal axis shows the excess gain of the Russell, and the vertical is the excess gain of the Nasdaq.

You can see how the dots make up a downward sloping line. In simpler terms, when one index leads the market, the other lags and vice versa. One side of Wall Street is yelling “Go Nasdaq!” and the other is yelling “Go Russell!” It’s as if there’s no middle ground. The Russell was up another 3.5% today while the Nasdaq was up only 0.2%.

The Nasdaq did well on days when we thought rates were going to stay high, but the Russell did well on days when we thought rates would fall. Since Thursday, we’ve strongly moved from the first camp to the second camp.

Notice the dot at the lower right? That was last Thursday, the day of the inflation report. The Nasdaq fell 2% that day and the Russell was up by more than 3.5%. That’s one of the largest spreads between the two in decades.

Will small-caps continue to lead the market? I’m inclined to think they will, but perhaps not as dramatically as the last four days.

It looks like the Fed may only be getting started with its rate cuts. The latest futures prices indicate a 93% chance of a rate cut in September. There’s a good chance that we may see two more rate cuts this year, plus a few more next year. It’s possible that interest rates may be 1% lower by this time next year.

Yesterday, Jerome Powell said, “We didn’t gain any additional confidence in the first quarter but the three readings in the second quarter, including the one from last week, do add somewhat to confidence.” The fact is that the labor market has cooled off a bit and the inflation news has improved.

The recent change in leadership has been good for our Buy List. From May to July, the Buy List had been lagging the market, but now things are looking better. That reminds me of a quote from Michael Gayed: “There are no gurus, only cycles.”

One of our Buy List stocks that’s perked up is the Federal Agricultural Mortgage Corporation (AGM), better known as Farmer Mac. Lower rates are clearly good for its business. In the last month, the stock has gained more than 24% despite no real news being released.

AGM hasn’t said yet when it will report earnings for this quarter, but going by past years, it will probably report around August 6. Wall Street currently expects Q2 earnings of $4.11 per share. Even after the recent rally for AGM, the stock is going for less than 12 times next year’s earnings.

Good Retail Sales Report for June

The stock market was helped this morning by a surprisingly strong retail sales report. Last month, retail sales, except for autos, rose by 0.4%. That’s the most in three months. Wall Street had been expecting an increase of 0.1%.

If we include autos, then retail sales were unchanged, but that includes a 2% drop of auto dealers. Wall Street was expecting a drop of 0.3%. The retail sales number for May was revised up to 0.1%.

These numbers suggest that consumers were in good health as they headed towards the close of Q2. Thursday’s numbers are good to see because the consumer hasn’t appeared terribly healthy this year. While wages have gone up, so has inflation. Also, higher interest rates from the Fed have made it more difficult to finance new buying.

Of the 13 categories tracked by the Commerce Department, only three registered declines. Those included sales of gasoline, reflecting lower prices in the month. Sales at sporting goods stores also edged lower.

If we exclude auto dealers and sales at filling stations, then retail sales rose by 0.8%. That’s the most since early 2023. Bloomberg notes that “sales at health and personal care stores rose by the most since October, while sales at building material and garden equipment stores increased by the most since February.”

Shoppers were active last month. Sales for online retailers rose by close to 2%, and home building stores saw an increase of 1.4%.

The reason why it’s good to exclude auto sales for June is that many car dealers were impacted by a cyberattack. AutoNation said it will take a big hit to its earnings report.

The housing starts report is out tomorrow. We’re going to have lots more earnings reports coming up soon. The next big economic report will come next Thursday when the government releases its first estimate of Q2 GDP growth. I’m expecting a number that’s low but positive.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

Posted by on July 16th, 2024 at 6:12 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.