This week, investor confidence grew after the Federal Reserve's Federal Open Market Committee (FOMC) announced a significant 50 basis-point cut to short-term interest rates, lowering the federal funds rate to 4.75%- 5.0%. Chairman Powell hinted that the FOMC might initiate a series of rate cuts that could extend well into 2025, depending on economic conditions.

The week started off volatile, but the S&P 500 finished higher, led by the largest stocks. Large Cap Growth, High Beta, and Momentum outperformed, while the Russell 2000, Large Cap Value, and Low Volatility underperformed. One notable theme in the past few weeks has been investors pricing in slower economic growth and aggressive rate cuts

This week, the stock market experienced heightened share-price volatility. Investors are grappling with numerous uncertainties, including the direction of Federal Reserve rate policies, persistent inflation, fluctuating employment figures, corporate earnings, and the impending presidential election results.

Stocks traded higher early this week before giving back some gains on Thursday. It's been an impressive recovery in the equity market after the early-August volatility, with the S&P 500 less than -2% below its July 16th all-time high. This week’s gains were small with limited return dispersion, but there was a minor rotation underneath the surface.

This week, the S&P 500 continued to trade higher following the recent market volatility. The index has reclaimed its 50-day moving average and improved its technicals from the early August low. This week, the market returned to its 1H 2024 regime.

This week, the market experienced significant deleveraging as it saw a decline in risk appetite: defensive sectors and gold outperformed. Stock and bond volatility spiked, but the credit market showed little sign of stress. We expect residual volatility in the near term as the market seeks a new equilibrium.

This week, the Bureau of Economic Analysis (BEA) reported a 0.1% month-to-month increase in the personal consumption expenditures (PCE) price index, matching economists’ outlook for a 0.1% expansion; the headline PCE index was unchanged in May. On a yearly basis, the index rose 2.5%, on par with estimates and below the prior reading of 2.6%.

This week’s economic data from the Bureau of Economic Analysis (BEA) supports Wall Street’s anticipation of a “soft landing” for the U.S. economy, specifically a continued modest expansion and an avoidance of a recession. 

This week's performance was similar to last week. The Nasdaq 100, Momentum, Growth, and Technology sector underperformed, while the Russell 2000, Value, and Equal Weight factors outperformed. We attribute the ongoing factor rotation to the slow momentum trade as interest rate cuts come into view.

This week, the S&P 500 traded above 5,600 for the first time this week. However, the Thursday market rotation after the June CPI release shaped returns. Headline CPI fell by -0.1% in June, the slowest since May 2020. Core CPI rose by +0.1%, the slowest since August 2021.

This week, stocks and bonds traded range-bound. The large size factor continued to outperform Small, and there was limited factor and sector dispersion. Treasury yields were volatile but ultimately ended the week unchanged, with bonds remaining overbought territory after the recent drop in yields. Notably, WTI crude traded back above $80 per barrel.

This week’s performance was top-heavy as the size factor continues to shape equity returns. The Magnificent 7 propelled the S&P 500 and Nasdaq 100 to new all-time highs, with Technology as the top performer. This week’s note discusses this year’s top-heavy return profile and how it’s distorting headline returns.