While many were out enjoying the summer sun, the markets were busy at work for the month of July. As we’ve grown accustomed to, there was more rate cut news driving the market along with some interesting money movement from the Mag 7 to the broader market. The month of July reinforced the importance of diversified investments.
But before I jump to our regular scheduled programming, I wanted to touch upon the recent market volatility since the start of August. A bit of a perfect storm hit the markets the last few days:
- Disappointing US economic data was published such as the unemployment rate rose to 4.2%, jobless claims increased, and manufacturing data decreased. This data generated a belief that the US Federal Reserve has kept interest rates too high for too long and stoked recession fears. However it can be argued that this is overblown as other data such as GDP are still positive, and this pullback has increased the chances of US interest rate cuts in September.
- Japan increased its interest rate to 0.25% from 0.10%. This increase led to a jump in value of the yen. Up until this point, many large investors were borrowing yen at low rates, and investing the funds in high yielding bond markets. If the yen is no longer a cheap funding currency, this strategy no longer works. This exacerbated the recent sell off. The yen remains low and Japan looks to remain a competitive exporting country. Since the sell off, the Nikkei Index jumped back up over 10% on August 6th.
- The Magnificent 7 large valuations have caught up with them. Investors and the market are realizing that the AI trade will likely take longer than expected to payoff.
We never like to see corrections in the market, but no market goes up in a straight line. Pullbacks create opportunities for future growth. It also highlights the importance of staying diversified; from July 5th to Aug 5th 2024, the S&P500 is down -6.8%, the NASDAQ is down -9.8%, while iShares Core US Aggregate Bond ETF is up 2.1%. Having fixed income exposure provides portfolio downside protection. It is likely that market volatility will continue, but remaining diversified in your portfolio continues to be the best way to navigate the storm when the seas get rough.
Now onto our regular monthly update:
The Bank of Canada cut its key interest rate by another 0.25% to 4.50% in July. Canada’s GDP growth did increase in Q1 of 2024, but generally speaking, times are still tight for Canadians. The hope of the further rate cut is that debt pressures on individuals and companies will be slightly eased moving forward. The extra rate cut could potentially lower the price of shelter costs across Canada, which has been a contributor to inflation numbers.
As mentioned above, over the month of July, there was some interesting money movement. For much of the year, the talk has been about the Magnificent 7 (mega cap tech names like Nvidia and Meta) in the US, and huge amount of fund flows (purchases) have gone into these names by purchasing ETFs that track the S&P500 and the NASDAQ. However, in July, the market started to shift from those names and purchases began to heavily flow into the broader market.
According to data provided by VettaFi Pro, over the last month $6.9 Billion went into the iShares Russell 2000 ETF, which tracks the Russell 2000 index comprised of more mid-cap companies. This was the fourth most purchased ETF in the world for the last month. $3.3 Billion flowed into the US listed Invesco S&P500 Equal Weight ETF. The increase in flows into ETFs offering exposure to more mid-cap and small cap names can potentially be attributed to the market looking for more diversification outside of the Magnificent 7. According to recent economic forecasts and signals from the Fed, interest rates in the US are set to come down soon, when this does happen, more indebted small and mid-cap companies will benefit. Also, valuations and concentration risk in the S&P500 are very high due to most of its returns stemming from the mega-cap tech names such as Nvidia, Meta, and Apple. Equal weight flows ticking up can indicate a desire for more diversification and less risk.
In July, mega-cap tech names were a drag on the S&P500, which supported the flows into the broader market. The equal weighted S&P500 ETF (EQL) outperformed the market cap weighted S&P500 ETF (VFV) in July. EQL was up 5.51% and VFV was uo 2.14%.
I understand this is only one month of data and only time will tell whether the broadening of market returns and fund flows will continue, but potential future rate cuts should be a tail-wind moving forward. All that being said, July certainly supported the importance of diversified investments. If you have any questions let me know.
