In July 2024, the stock market saw mixed results, with most indexes closing higher. However, tech stocks, which had driven significant growth in the first half of the year, pulled back, leading the Nasdaq (1) to its worst July performance since 2014. In contrast, the Russell 2000 (1) and the Dow Jones Industrial Average (1) indexes had their best month of the year, with the Russell 2000 experiencing its strongest July since 2022. Sector-wise, real estate (7.5%), financials (6%), and utilities (5.9%) outperformed, while the communication services (-4.5%) and information technology (-2.4%) sectors declined. (2)
The tech-heavy NASDAQ entered a correction in July, especially dragged down by the semiconductor sector by late July, and into the first few days of August. The drawdown rapidly spread to the broader market indexes. If this caused you concern, it is understandable, but keep in mind that market corrections are a regular occurrence, and this correction’s magnitude isn’t unusual as the S&P 500 is down less than 10% from its recent high and still up over 10% year-to-date for 2024.
However, this drawdown can feel particularly unsettling when considering the decline in previously well-performing sectors, like Mega-cap tech and semiconductors, which were among the hardest hit. The graph below charts the year-to-date performance of the VanEck Semiconductor ETF (SMH) in blue, The NASDAQ 100 index ETF (QQQ) in pink, the S&P 500 index ETF (SPY) in red, and the Russell 2000 Small Cap Index ETF (IWM) in green.
It’s always challenging to pinpoint the exact causes of a market drawdown as there is always a confluence of factors, and this correction is no exception. However, considering the factors and developments that changed market sentiment can put the drawdown into context.
From July 10th to August 5th, 2024, the S&P 500 declined by nearly 8%, while the NASDAQ 100 dropped by about 13%.
In the first half of 2024, the economy grew faster than expected. GDP growth estimates were revised upwards, and new jobs were created at a higher rate than anticipated. Company earnings reports were generally strong, and stock prices continued to rise.
On July 11th, core consumer price inflation was reported at 3.3%. Although this is above the Federal Reserve’s target of 2%, it was lower than expected, boosting investor confidence that the Fed might soon cut interest rates—a positive sign for stocks, especially interest-rate-sensitive sectors like Real Estate, Banks, and Financials.
In the following five trading days, small-cap stocks, as represented by the Russell 2000 ETF (IWM) (green line in graph), surged nearly 12%. The expectation of lower rates triggered short covering (buying) by investors who had been pessimistic about small-cap stocks. Meanwhile, the tech-heavy Nasdaq (purple line in graph) declined by 1%. However, recent economic data shifted market sentiment rapidly.
On August 2nd, another significant data point emerged: non-farm payrolls. The number of new jobs created was 114,000, significantly lower than the expected 175,000. Market sentiment swung from excitement around lower inflation and rate cuts to concern that the economy was slowing too quickly, stoking recession fears. Weaker jobs imply a weaker economy, causing concern the Fed won’t (or can’t) cut rates quickly enough to stave off an accelerating slowdown.
Over the weekend, on Monday, August 5th, news from Japan rocked U.S. stocks at the open, making for a tough day for investors in what was the unwinding of the yen carry trade. The Bank of Japan raised interest rates, prompting a stock sell-off by investors who were short on Yen and needed to raise cash to cover their positions. This action caused the Yen to strengthen by 14% from its previous month’s low and led to a 20% drop in Japan’s TOPIX stock index over three days, marking its largest decline ever. Despite the initial sharp decline at the opening, U.S. markets managed to recover some losses by the close. In the following 4 days, the market regained some ground in choppy action. Ironically, a better-than-anticipated jobless claims report sparked a rally that notched the best day for the S&P 500, advancing 2.3%, since November 2022! It makes you want to say “pick a lane” already!
Looking ahead, it is reasonable to anticipate ongoing choppiness as the market adjusts to the recent downturn, processes new information, and finds its direction. To gain perspective, consider the market’s performance since the beginning of 2023. Broad stock market indexes have risen 35% since the start of the year, with the NASDAQ experiencing an impressive 55% increase and doing so without a correction. Additionally, not all market sectors reacted similarly to the recent downturn. While semiconductors have declined by about 24% since July 10th, the equal-weighted S&P 500 has risen by 1%, and the Bloomberg Aggregate Bond Index ETF (AGG) is up by 3%. Bonds and smaller stocks have helped mitigate some of the volatility, highlighting the benefits of diversification during uncertain times.
Although recent market volatility can be concerning, and more turbulence is expected, there are opportunities for recovery and growth. Markets may rebound as the Federal Reserve becomes less restrictive, recession fears diminish, carry trades stabilize, and corporate earnings improve. However, it is important to note that late summer and early fall tend to be more volatile, especially during a Presidential election year, and the unusually late change of a presidential candidate adds new uncertainty.
In summary, we are committed to a long-term investment strategy and diversified portfolios that align with our clients’ risk tolerance and time horizons. We will focus on what we can control and remain dedicated to investment strategies guided by your financial plan, ensuring well-diversified, cost-effective, and tax-conscious portfolios. Like seasickness, keeping your eyes on the long-term horizon can help alleviate the discomfort caused by short-term market fluctuations.
Your July portfolio reports have been deposited into your eMoney vault. We are reaching out to schedule reviews with our clients. Please contact us if you are ready for a review or need assistance. You can call us or schedule a review here.
Thank you for the trust you placed in us! We look forward to connecting soon!
1. The NASDAQ, Russell 2000, S&P 500, and Dow (DJIA) are unmanaged groups of securities considered to be representative of the stock market in general.
2. https://www.broadridgeadvisor.com/fmaweb/Newsletters/MarketSummaries.aspx?iplf=np
This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.
The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. Comments concerning the past performance are not intended to be forward-looking and should not be viewed as an indication of future results.
