Outlook 2025
15 Nov 2024
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:
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).
Arguably, what is really playing out is a squaring of (investor) positioning that had become too stretched. To simplify, most investors were:
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?
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.
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