As Lenin is quoted as saying, 'There are decades where nothing happens; there are weeks where decades happen.' That seems to be the case for July. Typically, summer markets are calm and uneventful as investors take a step back. That has not been the case this year.
So far, 2024 has been anything but normal, and you must wonder what future textbooks will show when they look back at this period and discuss what it was like to live through these times. We had been calling for an increase in volatility heading into the second half of the year for a few months, and while that may have been early, this has come to happen in the last few weeks.
There were a lot of reasons for the increase in volatility this month. US politics, which never seems to disappoint, continued to deliver shocks, creating massive swings. It started with the poor debate performance from President Biden, which increased the odds of a Trump victory. Add to that a failed assassination attempt on the former President, and the odds of a clean sweep for the Republicans rose to a near certainty. An election that was looking too close to call suddenly was not, and investors quickly had to scramble to put on their ‘Trump trade’ winners. Yet shortly thereafter, in another plot twist, Biden dropped out of the race to tighten the odds, causing some of these trades to be quickly reversed. As we stand today, it is back to being a tight race, albeit still favouring Trump as we await the next plot twist.
Adding to the volatility is the sudden turn from Central Banks, which now seem ready to embark on a globally coordinated easing. The Bank of Canada enacted its second rate cut of the cycle during the month and signalled more to come. The FOMC, even with a pause in July, seems determined to follow with rate cuts at the next few meetings. This is a development that has been cheered by markets that are now ready to see lower bond yields and interest rates.
Higher interest rates don’t affect everyone or every sector to the same degree. Large-cap technology stocks, such as the “Mag 7” that have led this rally, have very little debt, and rate cuts do little to help their businesses. On the other hand, the smaller cap and more cyclical value stocks that have lagged will benefit the most from rate cuts. With future rate cuts now all but guaranteed, we may finally be seeing the beginnings of the long-awaited rotation from Growth to Value.
This rotation was on full display last month. The Russel Small Cap Index (which is a proxy for value) outperformed the Nasdaq 100 (QQQs - Large cap technology stocks) by 11.7% for the month, one of the largest on record. With the major US indicies very concentrated in the large cap tech stocks we also saw the equal weighted S&P begin to play catch up to the broad market cap index with returns of 1.2% vs 4.5%.
The increased certainty in rate cuts and the volatile macro headlines have begun to weigh on the US Dollar. This is the kickstart we have been looking for to move Real Assets higher. Gold hit an all-time high in USD terms during the month. Silver is following, and crypto, seen as the new gold, is next, with Bitcoin back towards $70k and ether soon to follow.
All of this volatility is occurring right on the cusp of when markets normally hit a rough patch. We can all remember market shocks in the period between August and September. During a year that has already seen its share of historic events, is anyone comfortable making the call that the next few months will be boring and uneventful?
With uncertainty increasing around the world and economies beginning to slow, this is a time to begin thinking of defensive strategies for capital preservation. These strategies should include Real Assets as well as tactics to take advantage of volatility and limit exposure to crowded trades. With markets already experiencing returns higher than many had expected year to date, stepping back and preparing to take advantage of dislocations and forced selling seems reasonable.
— Greg Taylor, CFA, is the Chief Investment Officer of Purpose Investments
All data sourced from Bloomberg unless otherwise noted.
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