Small-Cap and Value Stocks Outshine Large-Cap Growth Ones

For the week ending 19 July 2024

As of midday Friday­­­­­, global equities were modestly lower on the week, though small-cap and value stocks benefited from a large-scale rotation out of large-cap growth ones. The yield on the benchmark US 10-year note was little changed on the week at 4.23% while the price of a barrel of West Texas Intermediate crude oil dropped around $3 to $79.85. Volatility, as measured by the Cboe Volatility Index (VIX), rebounded to 16.5 from 12.4 a week ago.

MACRO NEWS

Obama ups pressure on Biden to leave presidential race A Thursday afternoon article in the Washington Post said that former US President Barack Obama told allies that current President Joe Biden’s path to reelection in the presidential race has greatly diminished and that he thinks the president needs to seriously consider the viability of his candidacy. This is the clearest sign yet that Democratic Party elders are making a concerted effort to push Biden from the race. Also circulating this week were reports that Senate Majority Leader Chuck Schumer, House Minority Leader Hakeem Jeffries and former House Speaker Nancy Pelosi have all appealed to Biden to stand aside for fear that a poor performance at the top of the ticket could cause Democrats to lose control of the Senate and fail to regain control of the House of Representatives. Friday morning, NBC News reported that Biden’s family has started discussing his plan to exit the race, though the White House quickly issued a denial. Betting markets now give Vice President Kamala Harris a 57% chance of becoming the Democratic nominee. Biden‘s odds have dropped to 28%. 

Trump picks Vance as running mate On the first day of the Republican National Convention, former US President Donald Trump, days after surviving an assassination attempt while campaigning in Pennsylvania, chose Ohio Senator J.D. Vance as his vice-presidential running mate. The 39-year-old Vance, a Yale-educated lawyer, is from the populist wing of the Republican Party. While serving in the Senate, he has found common cause on certain economic issues with left-wing populists such as Elizabeth Warren and Bernie Sanders. Trump accepted his party’s nomination on Thursday night, stressing national unity in his address to delegates before shifting to his standard stump speech.

US retail sales beat expectations While at the headline level, retail sales were unchanged in June, they rose sharply after stripping out the volatile food, gasoline, auto and building materials components. That measure, the so-called control group, rose 0.9% from May, prompting economists to raise their Q2 gross domestic product forecasts.

ECB says decision on September cut “wide open” The European Central Bank kept interest rates unchanged on Thursday, saying that inflation measures were either stable or had edged down in June but that price pressures are still high, services inflation is elevated and headline inflation is likely to remain above target well into next year. Wages are still rising at an elevated rate, ECB President Christine Lagarde said, adding that inflation is expected to fluctuate around current levels for the rest of the year. Economic risks are tilted to the downside. The decision on whether to cut rates in September is wide open, she said. The market is pricing in an 85% chance of a cut at that meeting.

QUICK HITS

A widespread global IT outage disrupted transportation, hospitals and businesses early Friday after a security update by CrowdStrike reportedly went awry, impacting computers and servers running Microsoft Windows.

Bloomberg reported this week that US states are cutting spending at the fastest rate since the global financial crisis. Total general-fund spending is expected to fall to $1.2 trillion in fiscal 2025, according to an analysis by the Pew Charitable Trusts. That’s about a 6% decline from estimates of the prior fiscal year, which ended on 30 June for most states.

Analysts at UBS forecast that Trump’s proposed 60% tariff on imports from China could cut China’s annual economic growth rate by more than half.

Ursula von der Leyen won a second term as president of the European Commission.

So far in 2024, auto repossessions in the United States are up 23% compared with the same period last year, according to data from Cox Automotive.  

The US is reportedly exploring tougher restrictions against companies that give China access to advanced semiconductor technology. According to Bloomberg, the Biden administration is considering expanding controls on foreign products that use American-made technology.

In an interview with Bloomberg conducted in late June, Donald Trump said he would not remove US Federal Reserve Chair Jerome Powell in the middle of his term. Trump also said  he wants to cut the US corporate tax rate from 21% to 15%. And highlighting the difficulty of thwarting any Chinese invasion of Taiwan, he opined that Taiwan should pay the US for its defense guarantees.

As expected, French Prime Minister Gabriel Attal resigned on Tuesday in the wake of the recent election, but he and his government will stay on as caretakers until a new cabinet is appointed. On the Thursday, the National Assembly reelected President Emmanuel Macron’s choice, Yaël Braun-Pivet, as its president.

Inflation in June held steady in the United Kingdom at a 2% annual rate. The core rate rose 3.5%. Amid cooler-than-usual weather, retail sales in June fell 1.2% from the month before.

The US Federal Reserve’s Beige Book highlighted slight-to-modest economic growth in in the majority of districts. Prices rose modestly, wages grew modestly to moderately and household spending was little changed in most districts. Employment rose at slight pace, the report showed.

The economic drag from China’s beleaguered property sector weighed on the country’s Q2 GDP figures. The economy grew a weaker-than-expected 4.7% year over year last quarter, slower than the 5.2% pace in the first quarter. Retail sales were anemic in June, rising 2% from the year before after rising 3.7% in May.

The classified documents case against Trump was dismissed by US district court judge Aileen Cannon, who ruled that the appointment of special counsel Jack Smith violated the constitution. Cannon ruled that because Smith had not been named to the post by the president or confirmed by the Senate, his appointment was in violation of the appointments clause of the US constitution. The Department of Justice has appealed the ruling.

THE WEEK AHEAD

Next week will be a quiet one from a data perspective. US existing home sales will be released Tuesday. On Wednesday, flash purchasing managers’ indices are due out as are US new home sales data. Also on Wednesday, the Bank of Canada will meet to set interest rates, with a cut almost fully priced in by investors. The market’s first look at Q2 US GDP data is set for Thursday, with core PCE the highlight on Friday.

EARNINGS NEWS

With about 14% of the constituents of the S&P 500 Index having reported for Q2 2024, blended earnings per share (which combines reported data with estimates for those that have yet to report) shows that earnings  rose around 9.7% compared with the same quarter a year ago, according to data from FactSet. This was faster than the 6% pace set in Q1. Sales growth is up 4.6% year over year.