Into the Weeds: Which Way Did the Market Go?

Triathlon Partners Analysis

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Portfolio Rebalancing and Sector Rotation: Which Way Did the Market Go?

If you only read the headlines, then the market crashed today. The Nasdaq 100, QQQ was down 2.2%, as the mega caps got trounced. The ten largest companies in the index, compose 53.5% of its value as of Wednesday, and all ten traded lower today. Tesla was down 8.4% and Nvidia 5.6%. This is a large move for one day, so let’s look under the hood and analyze!

The Nasdaq 100 is still higher than last week, is up 5.8% in the last month, and year to date it has appreciated over 20%. The ten largest companies accounted for 85% of today’s trading losses. The remaining companies were down .33% on the day, a relatively insignifcant number when looking long term and big picture.

The S&P 500, a broader index, was down .87% today. The ten largest companies in the Nasdaq 100, QQQ, brought this index down 1.24%, and compose 36.5% of the index as of Thursday evening. The remaining 490 stocks were higher on the day by .37%. A different story is emerging.

The S&P 500 is broken down into 11 sectors. Four sectors were down on the day and seven closed higher. The sectors that traded lower are dominated by the ten largest companies on the Nasdaq 100, QQQ, communications, consumer discretionary and technology. The remaining seven sectors closed higher by a minimum of .7%. These sectors are old school: healthcare, industrials and financials. They are very interest rate senstive. The S&P 500 is up 18% for the year, and these sectors are lagging. Healthcare and industrials are up about 7% on the year.

The Russell 2000 which is composed of small companies have not performed well this year. However today they closed 3.6% higher, which brings there year to date return to 5%.

Which way has the market gone? The Nasdaq 100 which is dominated by a handful of companies in the sectors that have performed extremely well was down 2.2%. The Russell 2000 is the mirror opposite on the day and year. The QQQ had outperformed the Russell by 20.8% for the year as of Wednesday’s close, but that gap narrowed by 5.8% today to 15%.

The story is not the selloff in the market, as it was only a small pull back in the context of year to date returns. The story is the rotation of money into sectors of the economy that perform better with lower interest rates. Why such a sudden move today? The consumer price index for June reported significantly lower inflation than expected. Fed Chairman Powell spoke to Congress this week and gave the impression that interest rates could be lowered soon, as the dynamics in the economy have changed. A slowing job/employment market might necessitate lowering rates to avoid a downturn in the economy. Lower rates benefit companies that borrow, which include small companies that rely on it to grow as well as old school sectors that rely on capital expenditures. The stocks that have dominated the market over the last 18 months are cash rich, and are not as sensitive to rates.

Only time will confirm if this is the start of a trend or just a knee jerk reaction. Either way, volatility will increase as the market hones in on inflation and jobs data. It will dissects every word and punctuation mark in Federal Reserve communications. Hang on tight, this might not be a sleepy summer market!