Market Recap 7/5/2024: Tech Surge Propels S&P 500

U.S. stocks notched impressive gains in the holiday-shortened week, with the S&P 500 and Nasdaq Composite surging to fresh all-time highs on the back of robust tech sector performance and a stronger-than-expected jobs report. The S&P 500 jumped 2.0% to close at a record high, extending its year-to-date gain to 17.6%. The tech-heavy Nasdaq Composite led the charge, soaring 3.5% for its tenth positive week in the last eleven, pushing its 2024 advance to a remarkable 22.7%.

Key Takeaways

• S&P 500 surges 2.0% to record high, up 17.6% YTD
• Nasdaq Composite jumps 3.5%, extends 2024 rally to 22.7%
• Dow gains 0.7%, lags with 5.5% YTD advance
• Economy adds 206,000 jobs in June, beating estimates
• Unemployment rate rises to 4.1%, highest since November 2021
• Treasury yields fall on rising Fed rate cut expectations
• Oil climbs above $83/barrel, Bitcoin tumbles below $54,000

Jobs Report Paints Mixed Picture

The main catalyst for the week’s rally was the June jobs report, which showed the U.S. economy adding 206,000 jobs, handily beating economists’ expectations. The strong payroll gains suggested that the labor market remains resilient in the face of the Federal Reserve’s aggressive rate-hiking campaign.

However, the report wasn’t uniformly positive. The unemployment rate ticked up to 4.1%, its highest level since November 2021, indicating that more Americans are entering the job market or facing layoffs. Additionally, downward revisions to April and May’s job figures pointed to a modest cooling in hiring momentum.

The mixed signals from the labor market fueled speculation that the Fed may be nearing the end of its tightening cycle, with investors increasingly betting on a potential rate cut later this year. This sentiment was reflected in the bond market, where the yield on the 10-year Treasury note fell to 4.28% from 4.37% the previous week.

Tech Titans Lead, Small Caps Lag

The week’s gains were driven largely by strength in the technology and communication services sectors, which both surged 3.9%. Mega-cap tech stocks like Apple, Microsoft, and Alphabet continued their remarkable run, benefiting from enthusiasm around artificial intelligence and cloud computing.

However, the rally wasn’t broad-based. The Russell 2000 index of small-cap stocks fell 1.0%, extending its year-to-date loss to 0.1%. The underperformance of smaller companies highlights the growing divergence between the market’s biggest winners and the broader economy.

Energy stocks also lagged, falling 1.3% despite a rise in oil prices. West Texas Intermediate crude climbed above $83 per barrel, its fourth straight weekly gain, on the back of declining U.S. inventories and forecasts of tight global supply.

International Markets Join the Party

The bullish sentiment wasn’t confined to U.S. shores, with international markets also posting strong gains. The MSCI EAFE index of developed market stocks rose 2.2%, bringing its year-to-date advance to 8.0%. European markets were particularly strong, with France’s CAC 40 jumping 3.8% and Italy’s FTSE MIB gaining 3.3%.

Asian markets also participated in the rally, with Japan’s Nikkei 225 climbing 3.1% and China’s Shanghai Composite adding 1.2%. The broad-based gains underscore the global nature of the current bull market, driven by hopes for a soft landing in major economies and continued central bank support.

In a continuation of last week’s trend, hedge funds sold U.S. technology stocks in June at the fastest pace since 2016, according to data from Goldman Sachs. The selling was particularly pronounced in semiconductor stocks, suggesting growing skepticism about the sustainability of the sector’s recent gains.

However, the picture wasn’t uniformly bearish for tech. Hedge funds increased their allocations to tech hardware and electronic equipment, indicating a more nuanced approach to the sector. This rotation within tech highlights the challenges investors face as they navigate an increasingly complex market environment.

Bridgewater Bets Big on AI

While some hedge funds are scaling back their tech exposure, others are doubling down on the potential of artificial intelligence. Bridgewater Associates, the world’s largest hedge fund, launched a new $2 billion fund that uses machine learning for investment decisions.

The fund, part of Bridgewater’s Artificial Investment Associate Labs project, aims to generate alpha through advanced AI models while maintaining human oversight for risk management and trade execution. The move underscores the growing importance of AI in the investment management industry and could herald a new era of AI-driven hedge fund strategies.

Conservative Investors

With the market at record highs and valuations stretched in some areas, conservative investors may want to focus on high-quality, dividend-paying stocks in defensive sectors like utilities and consumer staples. Short-duration investment-grade bonds can provide stability and income in a potentially volatile environment.

Growth Investors

While the tech sector’s run has been impressive, selectivity is key at current levels. Look for companies with strong competitive moats, sustainable growth prospects, and reasonable valuations. Emerging areas like AI, cybersecurity, and renewable energy may offer long-term opportunities for patient investors.

Opportunistic Investors

The divergence between large-cap tech stocks and the broader market may create opportunities in overlooked areas. Small-cap value stocks and international equities, particularly in Europe and emerging markets, could offer attractive risk-reward profiles. Keep an eye on the energy sector, which may benefit from rising oil prices and geopolitical tensions.

Our Take: Caution Warranted as Rally Narrows

The market’s continued ascent to new highs is certainly impressive, but we believe investors should approach the current environment with a healthy dose of caution. The narrowing breadth of the rally, with gains concentrated in a handful of mega-cap tech stocks, raises concerns about the sustainability of the advance.

At the same time, the mixed signals from the labor market and the bond market’s pricing of potential rate cuts suggest that the economy may be more fragile than headline numbers indicate. While a soft landing remains possible, the risk of a sharper slowdown or recession cannot be dismissed.

Given these crosscurrents, we believe that a balanced and diversified approach is warranted. Investors should resist the temptation to chase performance in high-flying tech names and instead focus on building resilient portfolios that can weather potential volatility ahead.

That said, we remain constructive on the long-term potential of transformative technologies like AI and cloud computing. The key is to invest in these trends thoughtfully and selectively, rather than indiscriminately piling into the sector’s biggest winners.

The week ahead brings a fresh batch of economic data that could provide further clues on the health of the U.S. economy and the Fed’s likely path forward. The June Consumer Price Index (CPI) report, due out on Wednesday, will be closely watched for signs of easing inflationary pressures.

Earnings season also kicks off in earnest, with major banks like JPMorgan Chase, Citigroup, and Wells Fargo set to report results. These reports will offer important insights into consumer spending, lending activity, and the overall health of the financial sector.

On the monetary policy front, investors will be parsing comments from Fed officials for any hints about the central bank’s thinking on rate cuts. While a pause in rate hikes seems likely at the upcoming July meeting, the timing and pace of potential cuts remain a subject of intense debate.

Finally, geopolitical risks continue to simmer in the background, with tensions between the U.S. and China, ongoing conflicts in Ukraine and the Middle East, and the potential for unexpected shocks all posing threats to market stability.

 

Views expressed here should not be considered personal investment advice.

Sources:
Hedgeweek

AP News

Mint

JH Investments