- Markets have seen a sharp rotation following last week’s softer inflation report. The market is now pricing a near certainty of a Federal Reserve (Fed) rate cut in September.
- Historically, the equity market has tended to rise over the year following the first rate cut, as long as the economy avoids a recession. This is our base case.
- The S&P 500 has rebounded 14.1% following the April pullback, which is approaching the median gain of 17.6% and average of 19.5% following past rebounds since 2009. We anticipate markets to trade in a choppier fashion as we move into the traditionally weaker August and September period.
- Longer term, the current bull market gain of 58% is still well below the median of 108%. Thus, we would stick with the primary trend and look at pullbacks as opportunities.
- We downgraded the tech sector from overweight to neutral in late June following extreme outperformance. Longer term, we still view tech as leadership, but the rubber band became too stretched on a short-term basis.
- Small caps – Even with the sharp gains of the past week, aided by the increased probability of the Fed lowering interest rates, relative performance still appears to have upside. Small caps remain below the 2021 peak and are coming off one of the most extreme underperformance periods in history. Earnings, which continue to lag, remain a key for a sustainable longer-term shift.
- Market participation has broadened, as evidenced by the S&P 500 Equal Weight Index reaching a fresh all-time high, a healthy sign.
- Maintain U.S. bias – There has been little evidence of a shift in relative price trends toward international markets during the most recent cyclical rotation.
- We still see value in a modest gold position for portfolio diversification. Gold prices just broke out to fresh all-time highs.
- Elections – Polls have been shifting rapidly over recent weeks. Markets historically have done fine under a wide range of partisan control in Washington.
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