Weekly Wrap-Up
During the week of July 8 through July 12, 2024, the U.S. financial markets experienced a range of developments that impacted various sectors. Major indices, including the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite, continued to show resilience and reached record highs or near-record levels, driven by a combination of positive economic data and investor sentiment.
The Dow Jones Industrial Average rose by almost 2%, nearing its record high of 40,003.6 points set two months earlier. The S&P 500 and the Nasdaq Composite posted fractional gains, underscoring the ongoing bullish sentiment in the market. This optimism was fueled by a better-than-expected inflation report released on Thursday, which indicated that the Consumer Price Index (CPI) had slipped by 0.1% from May to June. This marked the first month-to-month drop in inflation since May 2020 and brought the annual inflation rate down to 3.0% from 3.3% in the previous month. However, a separate report on Friday showed a larger-than-expected rise in wholesale prices, adding some uncertainty to the inflation outlook.
Small-cap stocks saw a significant surge, with the Russell 2000 Index posting a 6.0% total return for the week, its highest level since January 2022. Despite this strong performance, the Russell 2000 continued to lag behind its large-cap peers on a year-to-date basis, highlighting the ongoing divergence between small-cap and large-cap stocks
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The week also marked the beginning of the earnings season, with mixed results from three major U.S. banks reporting their second-quarter numbers. Two of the banks reported year-over-year declines in earnings, reflecting the challenges faced by the financial sector. Entering the earnings season, analysts had forecasted an overall earnings growth of 8.9% for the S&P 500 compared to the previous year’s second quarter, the strongest quarterly growth rate in over two years.
A notable development during the week was the outperformance of U.S. large-cap value stocks compared to their growth counterparts. A large-cap value index posted a 2.8% total return, while the growth index slipped by 0.4%, eroding some of the growth style’s year-to-date outperformance. This shift in investor preference indicated a rotation into more defensive and value-oriented sectors amid concerns about economic growth and inflation.
Government bond yields declined significantly over the week, as investors interpreted the inflation report as a sign that interest-rate cuts could be on the horizon. The yield on the 10-year U.S. Treasury bond fell to 4.18% at Friday's close, the lowest in nearly four months. Yields on 2- and 30-year notes also declined, reflecting broader expectations of easing monetary policy.
Consumer sentiment showed signs of weakness, with the University of Michigan’s Consumer Sentiment Index dropping to its lowest level in eight months. Despite this decline, the survey found some improvement in consumers’ inflation expectations for the second consecutive month, providing a mixed picture of consumer confidence.
The retail sector remained a focal point, with anticipation building for the scheduled release of U.S. retail sales data. In May, retail sales had risen by 0.1% month-over-month after a 0.2% decline in April, both figures showing a sharp drop from the gains recorded in the earlier months of the year. The upcoming data was expected to provide further insights into the state of consumer spending and economic activity.
In summary, the week of July 8 through July 12, 2024, was marked by a combination of record highs in major stock indices, significant gains in small-cap stocks, mixed earnings reports, a notable shift in investor preference towards value stocks, declining bond yields, and weakening consumer sentiment. The inflation report played a crucial role in shaping market expectations for future interest-rate cuts, while the beginning of the earnings season provided a glimpse into the financial health of major corporations. Investors remained focused on upcoming economic data and the potential implications for monetary policy, navigating a complex landscape of economic indicators and market dynamics.
Institutional Dollar Index for Major Indices
The Institutional Dollar Index (IDI) expresses institutional volume as a percent of total daily volume by day. High values mean large institutional involvement and may suggest a directional commitment by larger players; low values mean low institutional involvement and suggest a continuation of current conditions. Like all institutional flow we look at, the direction can’t be known by this data itself; what is most important is the subsequent reaction to liquidity when it shows relatively high readings.