Equity Volatility Rising

July 23rd, 2024

LAST WEEK’S RECAP

Equity volatility rose to the highest levels since April as the seismic rotation out of U.S. mega-cap stocks continued for a second straight week. Additionally, geopolitical risk in the semiconductor sector contributed to the divided results for U.S. equity indices. The Nasdaq Composite index sank 3.7%, while the S&P500 slid 2%. The Russell 2000 finally pulled back late last week but still added 1.7% to its recent run. S&P500 sector performance was spilt, but technology was notably weaker after the Biden administration told allies it is considering tougher restrictions on companies that continue to make advanced semiconductors available to China.

The PHLX Semiconductor index plunged nearly 9% for the week. Crude oil prices were lifted mid-week by a drawdown in U.S. inventories but ended lower by 4%. China’s leadership party plenum failed to convince traders that any major stimulus measures were forthcoming that might support oil demand. Gold futures eased after reaching a new all-time high on Tuesday. U.S. Treasury yields finished modestly higher on stronger economic data. Retail sales rose in June by the most in three months, while industrial production advanced 0.6% MoM. U.S. housing starts rebounded last month, although single-family home construction declined to an eight-month low as high mortgage rates continued to hamper affordability. Weekly jobless claims jumped to 243k, suggesting more difficulty for Americans seeking new employment.

Elsewhere, the European Central Bank made no change in monetary policy after cutting rates last month. Its statement was in line with expectations, and market pricing suggested two additional quarter-point cuts this year. In the UK, CPI held at 2% YoY in June, with services inflation proving to be sticky. Despite slowing wage growth, a cooling labor market, and declining retail sales, British investors pared down odds of a rate cut at the August 1 central bank meeting. Canada’s inflation rate dropped to 2.7% YoY in June, giving the Bank of Canada plenty of runway to lower interest rates at the July 24 meeting. Finally, China’s economic data missed the mark, with GDP and retail sales growth both coming in below forecasts. The central committee’s communication following the Third Plenum was described as lacking specific measures to address the country’s economic struggles.

THE WEEK AHEAD

This is a pivotal week for U.S. investors, as the economic calendar features the first estimate of second-quarter GDP, June’s core PCE price index, and plenty of corporate earnings announcements.

Forecasts are calling for 1.9% GDP growth and a slight uptick in the core PCE reading. Prior to both releases, Wednesday’s global flash PMI figures may provide a more up-to-date look at economic performance in the first part of July, along with a look at how prices for goods and services are fluctuating.

This week’s earnings releases include Alphabet, Tesla, IBM, United Parcel Service, American Airlines Group, 3M Co., and many more. The rest of the U.S. economic agenda consists of new and existing home sales, durable goods orders, and revised consumer sentiment figures. Investors will also be watching how markets react to the rapidly changing U.S. political landscape after President Biden announced over the weekend that he would not seek re-election.

On the international side, the Bank of Canada is expected to cut interest rates by 25bps for the second straight meeting on Wednesday, but traders are split on how strongly the bank will signal its intentions for the rest of the year. Last of all, Japan’s Tokyo CPI data on Thursday evening could provide more clarity on rate hike probabilities when the Bank of Japan meets later this month.

(source: Charles Schwab)

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Definitions

Annualized Return: The rate at which an investment grows each year over the period to arrive at the final valuation.
Bear Market: A decline of at least 20% from the market’s high point to its low.
Beta: A measure of how an individual asset moves when the overall stock market increases or decreases.
Correlation: A measure of the extent to which two variables are related.
Dividend Yield: The dividend yield or dividend-price ratio of a share is the dividend per share, divided by the price per share. It is also a company’s total annual dividend
payments divided by its market capitalization, assuming the number of sharesis constant.
Developed Markets: A country that is most developed in terms of its economy and capital markets. The country must be high income, but this also includes openness
to foreign ownership, ease of capital movement, and efficiency of market institutions.
Emerging Markets: A country that has some characteristics of a developed market but does not fully meet its standards. This includes markets that may become
developed marketsin the future or were in the past.
GrowthFactor Stocks: Growth stocks are companies expected to grow sales and earnings at a fasterrate than the market average.
LargeCap Stocks: Shares of publicly traded corporationswith a market capitalization of $10 billion or more.
LTM: An acronymfor”Last Twelve Months”or the past one year.
NTM:An acronymfor”Next Twelve Months” or the next one year.
Price Return: The rate of return on an investment portfolio, where the return measure takes into account only the capital appreciation of the portfolio, not including
income generated in the form of interest or dividends.
Total Return: Return on a portfolio of investmentsincluding capital appreciation and income received on the portfolio.
Small Cap Stocks: Small-cap stocks are shares of companieswith a market capitalization of less than $2 billion.
Standard Deviation: In statistics, the standard deviation is a measure of the amount of variation or dispersion of a set of values. A low standard deviation indicates the
valuestend to be close to the historical average of the data set, while a high standarddeviationindicatesthe current value is outside of the historical average range.
Value Factor Stocks: Stocksthat are inexpensive relative to the broad market based on measures of fundamental value (e.g., price to earnings or price to book).

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