Markets sailed to new records in the first half of the week, only to see the rally get smothered on Wednesday. The rest of the week marked one of the largest stock declines this year. The S&P 500 (SPX) clocked its worst week since April, diving by almost 2%, while the Nasdaq Composite (NDAQ) dropped by 3.7% and the large-cap tech benchmark Nasdaq-100 (NDX) tumbled by nearly 4%. In contrast, the Dow Jones Industrial Average (DJIA) managed to finish the week in the green, up by 0.7%, helped by its strong surge in the first half of the week on the back of the continued rotation towards value shares. The VIX Volatility index – the measure of market anxiety – surged to its highest levels since April.
Markets entered the historically weak period of July and August with optimism, but the mood in the tech sector began to sour earlier this month. Recent economic data along with Jerome Powell’s remarks have convinced investors that the Fed will begin rate reductions in September. This outlook accelerated the attempts at rotation out of tech stocks, widely perceived as overvalued, into more cyclically oriented sectors that are expected to gain the most from the Federal Reserve’s rate cuts.
Amid heightened investor nervousness towards tech, several developments have coincided to trigger this week’s downfall of semiconductor stocks, starting with soft sales guidance from the world’s most important high-end chip machinery maker ASML (ASML). Later reports that the Biden administration is considering clamping down further on the chip equipment sales to China reverberated through the whole semis sector.
Adding to the rotation imperative, as the odds of Donald Trump’s election victory rose, the markets began to embrace the so-called “Trump trades,” including banks, defense, and traditional energy stocks. Trump added to technology’s woes on Wednesday, saying that Taiwan should pay the U.S. for its defense against possible Chinese hostility. The shares of the world’s largest chip foundry Taiwan Semiconductor Manufacturing (TSM) tumbled on the news. TSM makes about 90% of the most advanced semiconductors used in AI applications; its fate is crucial not only for chipmakers but for the entire global economy.
Speculations about Joe Biden dropping off the election race have intensified, driving a sharp rise in the perception of political uncertainty and adding to investor anxiety. As clouds gathered towards the end of the week, the winners of the previous sessions – small caps, financials, and healthcare shares – also sharply declined.
Four Economic Events
Here are four economic events that could affect your portfolio this week. For a full listing of additional economic events, check out the TipRanks Economic Calendar.
» July’s S&P Global Manufacturing PMI and Services PMI (preliminary readings) – Wednesday, 07/24 – The Manufacturing PMI captures business conditions in the manufacturing sector and is considered an important indicator of business conditions and the overall economic climate in the U.S. The Services PMI captures business conditions in the services sector; it is a crucial indicator since this sector is responsible for over 70% of total U.S. GDP. PMI indices are leading economic indicators used by economists and analysts to gain timely insights into changing economic conditions, as the direction and rate of change in the PMIs usually precede changes in the overall economy.
» Q2 2024 GDP Growth Annualized (advance estimate) – Thursday, 07/25 – This report will provide an early insight into a change in GDP in the previous quarter. Economists project that the pace of growth quickened to 2% in the second quarter, up from Q1’s 1.4% annualized rate. The increase is due to the estimated growth in personal spending, which has been on the rise as inflation has cooled in recent months. A higher-than-forecasted reading could lead to a delay in expectations for Fed rate cuts.
» June’s Core Personal Consumption Expenditures (Core PCE) – Friday, 07/26 – This report reflects the average amount of money consumers spend monthly, excluding seasonally volatile products such as food and energy. FOMC policymakers use the annual Core PCE Price Index as their primary inflation gauge. Core PCE inflation slowed in May on an annualized basis, with markets expecting that the disinflation trend has continued over the past few months, supporting the odds of a September rate cut.
» July’s Michigan Consumer Sentiment Index and UoM 5-year Consumer Inflation Expectations (preliminary readings) – Friday, 07/26 – These reports portray the results of a monthly survey of consumer confidence levels and consumers’ views of long-term inflation in the United States. The level of confidence affects consumer spending, which contributes about 70% of the U.S. GDP. The inflation expectations index is used as a component of the Fed’s Index of Inflation Expectations calculations.
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