Big Changes in the Equity Markets

The Dow Jones Industrial Average (which has a lot of value stocks) closed up over 700 points today, hitting a new record high, almost 41,000.   The Russell 2000 small cap index was up 3.5%, as small cap and value stocks continue to react to good news about inflation and lower interest rates.1

Large cap growth stocks, the best performers in recent years (and this year through the end of June), were down.  The Magnificent Seven stocks are not part of this rally, which started last Thursday after the latest CPI numbers were released.  We wrote a short piece at that time that we wanted to publish, but events moved so fast that we felt the need to update our communication before sending, as we have here.  We have included below our first thoughts from last Thursday, “in the moment” so to speak.

As we mentioned recently, this could be the start of a “broadening” of the stock market rally, when the other 493 stocks in the S&P 500, not to mention all the small stocks in the Russell 2000, start catching up to the Mag 7.  The wise investor stays invested in all of these, rather than chasing the hot stocks, because we know that change comes suddenly and unexpectedly. 

Thoughts from Thursday Afternoon, July 11 

As a quick follow up to our quarter end letter, I wanted to share some news from this morning.  The context for this is what we described in our recent letter about stickier inflation and the dominance of the Mag Seven tech stocks this year, through the end of Q2 and right up to yesterday (July 10), when the S&P 500 and the tech heavy NASDAQ index hit new record highs.

At 8:30 am ET the government released a set of CPI numbers that sent interest rates plunging.  Month-over-month CPI was actually negative, -.1% versus an expected .1%.2 The year over year increase was 3.0%, also lower than expected.  This was the second set of good CPI numbers, and the markets liked them.

As I write this just before 2 PM: 

• The 2- and 10-year Treasuries are yielding 4.51% and 4.20%, respectively,3 down sharply today as trader expectations for a Fed rate cut by September are 100% now.4 

• Mag Seven stocks have declined sharply, while investors fled to stocks like small caps which are expected to benefit from lower interest rates and a broader benefit for the economy.  The S&P 500 index is down 1% and the NASDAQ is down 2%, but the Russell small cap index is up 3.6%!5 

• Stocks like Nvidia and Meta dropped 4-5%.6 

To be clear, this may or may not turn out to be the big turning point when the market pivots away from the Mag Seven stocks and returns to the more attractively-priced value, small cap and international stocks that belong in every well diversified portfolio.  But it certainly could be.  Stay tuned. 

1. Harring, Alex, and Lisa Kailai Han. “Dow Jumps 700 Points, Russell 2000 Rises 3% as Market Rally Gains Steam: Live Updates.” CNBC, 16 July 2024, www.cnbc.com/2024/07/15/stock-market-today-live-updates.html.

2. Alicia Wallace, “Prices fell in June for the first time since the start of the pandemic.” CNN, 11 July 2024, https://www.cnn.com/2024/07/11/economy/us-cpi-consumer-inflation-june/index.html.

3. CNBC Yield Quotes. Accessed July 16th 2024. https://www.cnbc.com/quotes/US2Y and https://www.cnbc.com/quotes/US10Y.

4. Melloy, John. “Traders See the Odds of a Fed Rate Cut by September at 100%.” CNBC, 16 July 2024, www.cnbc.com/2024/07/16/traders-see-the-odds-of-a-fed-rate-cut-by-september-at-100percent.html.

5. Morningstar Direct. Data as of 7/11/24.

6. Morningstar Direct. Data as of 7/11/24.

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