Price Action & Performance
The S&P 500 traded to an all-time high of 5667 on July 16, 2024. It ends the month with an approximately 5% correction, and a sharp rotation away from Mega Cap. Growth Leadership and into a broad array of YTD laggard sectors. There were plenty to choose from as only the Tech. and Comm. Services Sector had outperformed the S&P 500 Index through the middle of July. As we end the month of July, the S&P 500 persists in a long-term uptrend price structure. Notably, it enters the seasonally weak period from August through mid-October which this year will transpire against the backdrop of a likely bitter presidential election. We expect rotation away from Mag7 stocks to continue to be a theme in August as investors take profits, but we would expect them to come back in favor again before the end of the year.
Economic and Policy Drivers
The S&P 500 was flat for July, but the outlook has changed from a policy perspective. July’s inflation print was again near 3% yoy, and investors now expect interest rate policy to shift dovish for the remainder of the year. USD has softened in the near-term in response and interest rates on the 2yr and 10yr yield are at multi-month lows.
Interest rate policy projections will continue to be critical to positioning. For now, the expectation for lower rates has spurred bets on laggard industries and Sectors. Real Estate, Financials, Energy and Materials Sectors have accrued gains against this backdrop as lower rates are projected to spur marginal improvement in the Economy and lessen the probability of contraction. On the other hand, Utilities and Healthcare have also benefitted as the historical beneficiaries of lower rates and more conservative investor positioning.
High level concerns for the equity market include a flagging consumer. Rates have been arrested to the upside, but they are still far higher than pre-covid levels. The S&P 500 Homebuilders Industry rocketed higher in July on expectations that rate cuts will help home affordability, but many other industries within the Discretionary Sector have failed to sustain any level of outperformance.
Politics and Policy will factor into positioning over the next month. Bets on a second Trump Administration would likely involve going long the Energy Sector and Materials Sector as regulatory burdens would likely be eased. The Republican party is typically perceived as being more business friendly, but their likely immigration and foreign policy platforms (Withdrawl from NATO/Restrict Immigration) are potentially very inflationary. The view here is that the three main drivers of inflation going forward will be economic policy towards China (Donald Trump’s sanctions on China pre-covid and the subsequent dis-integration of the previous global supply chain paradigm were a driver of the current inflation we feel), over-restriction of immigration, and the other is the vast and growing wealth inequality that exists in this country. We think policy that addresses China relations, immigration and reforms the tax code would be the most important topics to watch as far as how they will affect the stock market.
How Can Sector Investing Help?
Sector ETF’s offer a great way to play the rotation presently underway in the equity market away from Growth and towards the Value style. Using the Sector SPDR’s as an example, XLF, XLE, XLB, XLI and XLU are a core part of the Value universe of stocks within the S&P 500. XLC, XLY and XLK contain a majority of the Mag7 and are concentrated Growth exposures. Managing exposure to the former and the latter can allow bets on the drivers of performance at the sector level.
In Conclusion
A near-term pause in the longer-term bull market is likely to continue from late July into August. The seasonal pattern is tactically bearish through early October and the S&P 500 has posted above average YTD gains through the end of July. We would expect correction and consolidation to be the theme over the next 1-2 months. We think there is more room to go in the broad rotation that kicked off in the back half of July. However, we are seeing some fast moves already and we expect XLK in particular will bounce sooner rather than later given it is already at a very oversold condition near-term.
ETFsector has created the Elev8 Sector Selection Portfolio as a framework for establishing a differentiated monthly view vs. our S&P 500 benchmark. Our starting weights for August are as follows:
Chart | S&P 500 Technicals
S&P 500 12-month, daily price (200-day m.a.|14-day RSI|12, 26, 9 MACD)
- S&P 500 re-established its uptrend in May
- MACD and RSI momentum are nearing oversold levels while near-term support is holding so far
- XLC and XLK have lost leadership while XLF, XLI, XLB and XLE have shown bullish reversal
