-

What’s happening with US stocks?

25 July 2024

Please note: All data referenced in this article are sourced from Bloomberg unless otherwise stated, and is accurate at the time of publishing.

The adage ‘one swallow does not make a summer’ feels very appropriate right now for investors. 

Despite US stock markets wobbling in recent days, this isn’t the start a prolonged contraction. It’s more a short-term correction, but there are nonetheless some important themes at play which are worth understanding. 

What’s happening?

In brief, yesterday was the first time in 354 trading sessions that the S&P 500 – a major US stock index – closed the day 2% down. In parallel, the NASDAQ Composite shed 3.6%, representing its largest daily drop since October 2022. It took the tech-heavy index 7.0% lower than its peak reached earlier this month.  

All in all, events on 24 July have snapped an extraordinary winning streak for investors in US equities.  While this may rattle some nerves, it’s important to keep a few things in mind. First, the NASDAQ is still up 15.5% this year, and is up more than 110% in the last five years (16% annualised). 

Always remember that past performance is never a guarantee of future performance.

Context is key

At its peak a couple of weeks ago, the S&P 500’s relative strength index (RSI) – an indication of how overbought/oversold an asset is – was above 80, which placed it squarely in overbought territory. 

In other words, the so-called “Magnificent 7” stocks – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla – (and by extension the NASDAQ) had been the only game in town for a while, forcing some investors to pile in for fear of missing out. 

Since the recent market dip, pundits have already come up with various explanations as to why this pullback is happening now. The most common is that this is the result of the “Trump trade”. The issue is that nobody knows what the “Trump trade” really is. Is it an inflation trade? Is it a growth trade? 

To answer this question, it helps to look at the cross-asset price action since the NASDAQ peaked – which, by the way, was the day prior to the US inflation print (CPI) coming out, and not when Trump was shot. Based on this, a few things are apparent:

  1. Bitcoin and small cap stocks have done well. This would normally be a “risk-on” indicator.
  2. On the other hand, the yen and the Swiss franc have appreciated versus the US dollar, maybe suggesting some demand for perceived safe-haven assets.
  3. Equally, gold is slightly up and so are US 10-year bonds (i.e. yields down). At the same time, oil prices are down more than $5 a barrel.

As such, it seems fair to say that the “Trump trade” is not really a risk-on trade. It doesn’t seem to be an inflation trade either as yields (and oil prices) have come down. It’s not even a growth trade. If it were, oil and yields would likely be up and gold down.

If it’s not any of these then maybe it is in fact the “Trump trade”? It’s certainly easier to explain erratic cross-asset class moves this way (especially if you can only show a single line of text on people’s TVs). 

A different perspective

Arguably, what is really playing out is a squaring of (investor) positioning that had become too stretched. To simplify, most investors were:

  • (very) long “tech” because of the hype around AI, but also genuinely attractive earnings growth stories.
  • they had zero exposure to small caps because they had been underperforming for so long.
  • overly exposed to the yen carry trade.

And then there’s Bitcoin, which remains its own unpredictable self. It can be a fool’s errand trying to understand how it moves. 

If you exclude the outliers listed above, then you see a market move that is more reminiscent of a growth scare than anything else. 

This perspective is consistent with recent macroeconomic data including yesterday’s Purchasing Manager Indexes (PMIs), as well as the fact that the Russell 2000 was actually down 2.1% yesterday, and the shape of the US yield curve. Indeed, the latter has been steepening quite aggressively in recent weeks, driven by the short end of the curve, in a move also known as a ‘bull steepener’. 

Contrary to what the name may imply, there is nothing optimistic about it, at least not initially. It is usually the result of markets starting to price in a more aggressive action from the central bank, which typically occurs when growth is slowing and the economy needs some stimulus.

So, what to make of the recent price action?

  1. It seems technical rather than fundamental. Washouts like these happen all the time.
  2. While this “rotation” may have legs in the short term (on a relative rather than absolute basis), especially if Microsoft and others disappoint next week, small caps need not be chased wholesale. These are typically bought when growth accelerates, not when it decelerates. 
  3. This episode should serve as strong reminder that diversification is important.

For anyone wondering if now is a good time to get invested, the answer isn’t ‘no’ because of events on 24 July. That’s not to rule out further downsides. But rather, the impact of yesterday would have been most extreme for those undiversified investors who were (unwisely) only exposed to the NASDAQ. In addition, there is invariably investor opportunity somewhere: close to 25% of the components of the NASDAQ Composite were up yesterday. Similarly, S&P 500 sectors such as utilities (+1.2%), healthcare (+0.8%) and energy (+0.2%) were all up yesterday.

As we said at the start, ‘one swallow does not make a summer’. Investing should always be viewed through a long-term lens, and this latest episode was testament to the mantra that diversification is an investor’s best friend over time. 

Please note: We will continue to update you if there are relevant events in the coming weeks. In the meantime, our Market Perspectives report returns in early September. 

Disclaimer

This communication is general in nature and provided for information/educational purposes only. It does not take into account any specific investment objectives, the financial situation or particular needs of any particular person. It not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful for them to access.

This communication has been prepared by Barclays Private Bank (Barclays) and references to Barclays includes any entity within the Barclays group of companies.

This communication: 

(i) is not research nor a product of the Barclays Research department. Any views expressed in these materials may differ from those of the Barclays Research department. All opinions and estimates are given as of the date of the materials and are subject to change. Barclays is not obliged to inform recipients of these materials of any change to such opinions or estimates;

(ii) is not an offer, an invitation or a recommendation to enter into any product or service and does not constitute a solicitation to buy or sell securities, investment advice or a personal recommendation; 

(iii) is confidential and no part may be reproduced, distributed or transmitted without the prior written permission of Barclays; and

(iv) has not been reviewed or approved by any regulatory authority.

Any past or simulated past performance including back-testing, modelling or scenario analysis, or future projections contained in this communication is no indication as to future performance. No representation is made as to the accuracy of the assumptions made in this communication, or completeness of, any modelling, scenario analysis or back-testing. The value of any investment may also fluctuate as a result of market changes.

Where information in this communication has been obtained from third party sources, we believe those sources to be reliable but we do not guarantee the information’s accuracy and you should note that it may be incomplete or condensed.

Neither Barclays nor any of its directors, officers, employees, representatives or agents, accepts any liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this communication or its contents or reliance on the information contained herein, except to the extent this would be prohibited by law or regulation.