Nicolet Wealth Management Monthly Newsletter – 8.2.24
Technology: Stronger than a ‘90s trend
Major stock market indexes were mixed in July, with the S&P 500 index up +1.2%, the Nasdaq Composite index falling -0.7%, and the Dow Jones Industrials Average rising 4.5%. The difference in performance can be explained by the relative weighting of Technology, which declined -2.1%. Technology is a significant component of the S&P 500 index and Nasdaq Composite. Investors feared technology was getting too expensive despite its exceptional earnings growth. Technology earnings are expected to grow 18.6% in 2024 and nearly 25% in 2025.
Market Rotation
Small-caps rose from the gallows, levitating 10.2% last month on a sharp investor rotation. The explanation for the reversal being sharp was the asset class’s valuation, which is cheap on numerous measurements. But a cheap valuation is never a catalyst. Stocks always look forward, attempting to gauge a changing earnings environment. The potential for more rate cuts than originally thought just a month earlier overwhelmingly favors small-caps because of its reliance on banks for loans. Bank loans tend to offer loans that fluctuate with market rates. Any shift lower in interest rates should help the profitability of small-caps, all else equal.
U.S. STOCK INDICES: JULY PERFORMANCE (GROWTH OF $100)
Consumer Continues to Pull Its Weight
Economic activity, as measured by real gross domestic product, accelerated to a level of 2.8% in the second quarter, up from 1.4% in the prior quarter and topping the consensus expectation of 2.0%. The upside in growth reflected stronger consumer activity, which grew at a level of 2.3% compared to the prior quarter’s level of 1.5% on necessities like healthcare, housing and utilities. Positive contributors from goods were derived from autos, furnishings and durable household equipment. Also on a positive note, business investment expanded 5.2% on equipment sales from imports of capital goods and autos. Along with net exports, residential investment was one of the few detractors, declining about 1.4%, from 16% a quarter earlier as the 30-year fixed mortgage rate rose 0.2% to 7.1%.
Inflation Growth Declining
All eyes were on inflation once again last month, leading to a shift in market sentiment. The headline inflation rate declined 0.3% to 3% in June and the core (excludes food and energy) inflation rate dropped 0.1% to 3.3%. All the pieces are falling right into place for the Federal Reserve to begin cutting rates. Core services, which have remained sticky and elevated this cycle, increased just 0.1% at the slowest pace since 2021 on housing rents and a sharp decline in airfares. Also contributing to slower inflation was core goods prices falling 0.1% on a 1.5% seasonally adjusted drop in used-car prices.
Federal Reserve Hints at Rate Cuts
The Federal Open Market Committee decided to leave the federal funds rate in a range of 5.25% to 5.5%, but the most significant takeaway from July’s meeting was Fed Chair Jay Powell’s comments on future target rate policy. Chair Powell said, “If we were to see, for example, inflation moving down quickly – or more or less in line with expectations – growth remains reasonably strong, and the labor market remains consistent with its current condition, then I would think that a rate cut could be on the table at the September meeting.” Also noted was further progress toward the committee’s 2% inflation objective and that “risks to achieving its employment and inflation goals continue to move into better balance.” Investors have fully priced in a 0.25% target rate cut in September, and a second one in either November or December, as inflation continues to move towards the Fed’s long-term objective of 2%.
Although we believe it to be reliable as of the publication date and have sought to take reasonable care in its preparation, all information provided is FOR INFORMATIONAL PURPOSES ONLY and we make no representations or warranties regarding its accuracy, reliability, or completeness and assume no duty to make any updates in the event of future changes. Past performance may not be indicative of future market results. Any examples used (including specific securities) are generic and meant for illustration purposes only and are not, and should not be interpreted as, offers to buy or sell such securities. To the extent indices are referenced, please note that you are not able to invest directly in an index.
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