Everything to Know about Macro and Markets
Stocks fell sharply for most of Friday’s session, staging an upward turnaround at the end of the trading day on the back of a benign PCE print. The S&P 500 (SPX) ended the day up and the technology benchmarks Nasdaq Composite (NDAQ) and Nasdaq-100 (NDX) finished almost flat, recovering from a mid-day drop. Meanwhile, the Dow Jones Industrial Average (DJIA) reversed two days of weekly losses, surging higher at the end of the session to clock in its best day of the year.
Still, markets ended the turbulent week in the red, with the Nasdaq Composite and Nasdaq-100 leading the declines.
So Much for “Sell in May”
Despite a down week, indexes rounded out a strong month, with the S&P 500 registering its best May since 2009 and the Nasdaq clocking its strongest May since 2003.
The S&P 500 is entering June near its all-time high, with a gain of 5.2% for the month. The Nasdaq Composite and Nasdaq-100 have surged over 7% in May, while DJIA added just 2.1%. June is historically a weak period in the stock markets with an average gain of just 0.1% since 1950, but election years typically see stronger outcomes.
Is the Tech Reign Wobbling?
Technology stocks suffered a pullback in investor confidence last week, as post-earnings selloffs in Salesforce and Dell Technologies added to worries that high-flying tech stocks have run too hot. Up until last week, the market was driven up by the members of the $1+ trillion market-cap club – Microsoft (MSFT), Apple (AAPL), NVIDIA (NVDA), Alphabet (GOOGL), Amazon (AMZN), and Meta (META), which were responsible for three-quarters of the 11% year-to-date gain in the S&P 500. This surge increased their weight in the index to a whopping 30%. Meanwhile, hedge funds reported a record exposure to these giants, with their weight exceeding 20% of single-stock holdings. single-stock holdings.
However, some Wall Street strategists warn that tech behemoths may see a bumpier road ahead. Thus, Bank of America assigns strong chances to the possibility of the market leadership shifting from growth stocks to value for the rest of the year as market breadth improves on the back of investor funds flowing to stocks trading at more reasonable valuations.
Uncertain Economic Backdrop
The pressures on equities have been building throughout the shortened trading week, as investors focused on Friday’s Core PCE report, the Fed’s preferred inflation gauge. In addition, weaker-than-expected Treasury note auctions sent yields sharply upwards, shaking demand for stocks that are trading way above their long-term average valuations. However, as inflation numbers aligned with expectations, markets staged a sharp turnaround in the last hour before the markets closed.
On the other hand, the reduced Q1 2024 GDP growth estimate signaled that the Fed’s restrictive policy may be succeeding in cooling down the economy, which would result in a continued inflation downtrend.
This week, investors will focus on several important economic reports that will be incorporated into the Federal Reserve’s future policy considerations. With the central bank in a blackout until its June 12th meeting, market participants will try to translate incoming economic data, specifically Friday’s crucial job market reports, into an actionable stock outlook. Currently, markets assign the highest probability to a single interest rate cut in December.
Will Volatility Return?
Friday saw some reemergence of volatility, as investors took profits at the end of the strong month, and money managers rebalanced their holdings. Earlier in the past week, investors faced several intraday pullbacks, disturbing this year’s lull. However, the Cboe Volatility Index (VIX) remained considerably below its long-term average through the end of May, even accounting for spikes in April and once again last week. Moreover, while several individual stocks suffered sharp drops in 2024, the S&P 500’s largest decline so far this year (in the beginning of April) has been one of the shallowest in the past 40 years, amounting to 5.5%.
In addition, so far this year, there has been just one trading day with a move of 2% or more (and it was an up day), as opposed to an average of 21 days with such moves in the five years through 2023. Considering the factors at play – sticky inflation, high interest rates, presidential elections, geopolitical risks – one would expect a much higher stock market volatility.
As the year proceeds, it would be advisable for investors to brace for sharper market swings, as this year has been abnormally quiet in terms of volatility. Options trading data suggests that investors are increasingly doubtful about the…
Read More: The Week That Was, The Week Ahead: Macro & Markets, June 2, 2024