​October started out surprisingly strong, with the market roaring into mid-month. Then the chop began, and the downslide.

​As I write, the S&P 500 is rapidly heading back to the flat line for the month. Most of the strategies suffered as well, largely attributable to a failing bond hedge. 

​The Surge in Treasury Yields

Since the Federal Reserve cut short-term rates by half a percentage point on September 19, the 10-year Treasury yield has gone from 3.6% to 4.2%.  Bond funds have an inverse relationship to yields. Case in point: TLT, the 20-year Treasury Bond ETF. Since that Fed rate cut, TLT has dropped 7%. That was not something the market was expecting, and most of our strategies were on the wrong side of that trade.

It was a rocky start to September. Nvidia plunged 9% on the very first trading day of the month. Roping in the last week of August, investors dumped stocks at their fastest pace since November 2020. Selling was led by institutional investors and hedge funds. Although to be fair, ETFs saw unusually high inflows throughout August.
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Why the selloff in stocks? The latest economic data – especially regarding the labor market - implied slowing growth for the U.S. economy. Fears reemerged that the Fed was behind the curve and the U.S. was heading for a recession. That’s right – recession. The boogeyman that refuses to die and haunts and taunts investors until sleep is elusive and portfolios can only be opened in the company of a stiff drink. 

The selling started on day one. On day three, a weakening U.S. jobs market sparked concerns over a possible recession, and a popular hedge fund trade linked to the Japanese yen blew up. The S&P 500 lost 3% and the Dow plunged more than 1,000 points - its worst sell-off in two years.

​Within the first three trading days of August, the Nasdaq had entered correction mode (down 10%). Apple was down 12%. Tech bellwether Nvidia was crashing more than 20%.

The roller coaster train had disengaged from the lift and down we were going, gravity at its most terrifying. 

​This has been painful.

​Before today, the Nasdaq was down -9.0% from its most recent high – just 15 days ago. The S&P 500 down -4.0% over the same two weeks. But for American Muscle, no strategy got out of July unscathed. What went wrong? 

The Great Rotation

One major U.S. index that was not struggling in July was the Russell 2000. It’s a market index composed of 2,000 smaller U.S. companies, and so far in July, the Russell 2000 has outperformed the Nasdaq by 12.8 percentage points. It’s on pace for its largest monthly lead since February 2001.

When the year began, analysts were tripping over themselves to predict a market slowdown from 2023's strong pace, with the consensus seeing the S&P 500 gaining only 8% to 9% for all of 2024.

So far, bad prediction – at least at the index level. With the first 6 months of 2024 under its belt, the S&P 500 is up 14% and change; the NASDAQ up a little further.
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But pull back the covers a bit, and the analysts are not that far off the mark. For example, the S&P 500 equal-weight index is up a more modest 3.82% for the year. What’s that, and why does it matter?  

Wall Street is on track to end May's trading month on a strong note. Softer inflation data earlier this month and better-than-expected quarterly earnings reports lifted investor sentiment and helped erase much of April’s ugliness.
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Of special note: Nvidia’s quarterly earnings, reported after the close on May 22. Investors had been on pins and needles in the days leading up to the report.

​Nvidia – the company spearheading the AI boom - has become the 800-pound gorilla of the market. 

Remember way back when (last month, to be exact) I mentioned that April is - statistically - the best month of the year on average for S&P 500 returns?

Well, not this time.
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Stocks are headed for their first losing month since October. The 30-stock Dow Jones Industrial Average is on pace for a more than 5% loss in April. The S&P 500 and Nasdaq Composite are headed for declines of more than 4% each.

Half the talk on Wall Street is about how the S&P 500 is up five straight months. The other half revolves around the question: when is the correction coming?

Since October of 2023, stocks have climbed the wall of worry and closed each month in the green. Blinders on, the market has managed to ignore vacillating inflation numbers, threats of recession, Fed speak, Fed silence, and the tea leaves of corporate earnings.

Most recently, advances were fueled by the Fed's latest remarks that maintained the central bank’s rate-cutting timeline for the year, as well as investors' ongoing enthusiasm for tech stocks amid the AI-powered rally. Overall investor sentiment remains above its historical average, reflecting persistent market optimism.

Pundits, analysts and investors had spent the first half of February flailing their arms over the most recent Consumer Price Index (CPI) and retail sales reports that showed prices growing faster than expected in January, walking back expectations for Federal Reserve rate cuts.

​[Goldman Sachs economists have dropped expectations for Federal Reserve interest rate cuts in 2024 to four from five previously, with the first reduction not coming until June.]

A slew of generally good corporate earnings reports kept hope alive, but in fits and starts. Amazon and Meta, for example, beating expectations. But Apple reporting weakness in the Chinese market. Talk of a market rally running out of steam became pervasive on the business channels. 

January gave a gentle push to the popular indices. Despite today’s selloff, at the close the S&P 500 and the Nasdaq-100 are up +1.60% and +1.82% respectively to begin the year.

Of course, to get a more complete picture, it’s helpful to look at some other data – for example, the S&P 500 equal weight index. It’s actually down -0.87% for the year. ​

​That signals to me the “Magnificent Seven” [Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms, and Tesla] continues to throw its weight around disproportionally, accounting for the vast majority of the strength in the market.
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In addition to marking the start of the year, January saw a few additional beginnings worth noting: