Weekly Wrap

It was a losing week for the stock market, but it wasn't necessarily a losing week for the broader market. The connection is that the losses were not broad based. Rather, they were concentrated among the mega-cap stocks and many of the growth stocks, namely the semiconductor stocks, that had been previously favored by the momentum crowd.

The Vanguard Mega-Cap Growth ETF (MGK) declined 4.0% this week while the Philadelphia Semiconductor Index dropped 8.8%. The former was a byproduct of consolidation activity following an extended period of outperformance. The latter was also a byproduct of consolidation interest; however, selling activity was catalyzed by a report that the Biden Administration is considering tightening export restrictions to China, and former President Trump saying Taiwan should be paying the U.S. to defend it while bemoaning how much semiconductor production occurs in Taiwan versus the U.S.

Mr. Trump's remarks touched a nerve since the market entered the week on speculation that he is likely to win the presidential election in November with his popularity boosted after a failed assassination attempt over the weekend at a Pennsylvania rally.

That speculation also fostered a contention that a Trump Administration would be more market friendly given former President Trump's push for deregulation and lower corporate tax rates. Those aims were spelled out at the Republican National Convention this week, which also featured the nomination of Ohio Senator J.D. Vance for Vice President.

That upbeat view contributed to an ongoing rotation trade that boosted the small-cap stocks, the cyclical stocks, and the value stocks at the start of the week, mostly at the expense of the mega-cap stocks and growth stocks

At its high for the week, the Russell 2000 was up 6.0%, but it would retreat in the latter half of the week along with most stocks in a consolidation trade. The Russell 2000 finished the week, which also featured the outperformance of the regional bank stocks, with a 1.7% gain. The SPDR S&P Regional Banking ETF (KRE) climbed 7.5% for the week.

An expectation that the Fed will be lowering rates soon spurred the continued buying interest in the bank stocks, as well as the homebuilders which are seen as beneficiaries of lower rates through the channel of lower mortgage rates. The iShares U.S. Home Construction ETF (ITB) gained 5.3% this week, supported by a strong move in D.R. Horton (DHI) following its earnings report.

This week's earnings news stayed true to form and was mostly better than expected, highlighted by pleasing news from Bank of America (BAC), UnitedHealth (UNH), Goldman Sachs (GS), Taiwan Semiconductor Manufacturing Company (TSM), Johnson & Johnson (JNJ), and SLB (SLB).

The market didn't get much mileage out of the reports, though, since many stocks had run up sharply in the weeks and months leading up to their results, including Netflix (NFLX) whose report was overshadowed somewhat in Friday's trade by a global IT outage that was triggered by a flaw in a technical update CrowdStrike (CRWD) was trying to implement and which infiltrated Microsoft's (MSFT) operating system.

The worst-performing sectors this week were information technology (-5.1%), communication services (-2.9%), and consumer discretionary (-2.7%), all of which house mega-cap components.

The earnings reporting activity will gather steam in the coming week as the Q2 reporting period kicks into a higher gear. Those reports will run side-by-side with an economic calendar that features the Existing Home Sales and New Home Sales reports for June, and the Personal Income and Spending report for June, which will include the Fed's preferred inflation gauge in the core-PCE Price Index.

• Nasdaq Composite: +18.1% YTD
• S&P 500: +15.4% YTD
• S&P Midcap 400: +8.4% YTD
• Russell 2000: +7.8% YTD
• Dow Jones Industrial Average: +7.0% YTD

Monday:

The stock market had a solid showing, leading the Dow Jones Industrial Average (+0.5%) to close at a fresh all-time high. The Russell 2000 continued its recent outperformance, jumping 1.8%, while the S&P 500 and Nasdaq Composite gained 0.3% and 0.4%, respectively.

Advancers led decliners by a 3-to-2 margin at both the NYSE and at the Nasdaq.

Outperforming bank stocks contributed to the upside bias today amid ongoing earnings news from the space. Goldman Sachs (GS 492.23, +12.35, +2.6%) was a winning standout after reporting earnings this morning. The SPDR S&P Bank ETF (KBE) closed 2.7% higher and the SPDR S&P Regional Banking ETF (KRE) jumped 2.9%.

The S&P 500 financial sector was a top performer, closing 1.4% higher. The only sector to close with a larger gain was energy, which jumped 1.6%. Meanwhile, the utilities sector was the worst performer by a wide margin, falling 2.4%.

The positive bias today was also related to the notion that this weekend's assassination attempt on former President Trump has increased his chances of winning the election in November. Mr. Trump is deemed by many to be a more market-friendly candidate due in part to his aim of deregulation and lower corporate tax rates.

An early rise in market rates was also attributed to the belief that former President Trump is likely to win in November, but Treasuries settled below their high yields. The 10-yr note yield settled four basis higher points to 4.23% after hitting 4.45% and the 2-yr note yield dropped one basis point to 4.45% after hitting 4.47%.

Reviewing today's economic data:

• July NY Fed Empire State Manufacturing -6.6 (Briefing.com consensus -6.0); Prior -6.0

Tuesday:

The Dow Jones Industrial Average (+1.9%) surged more than 700 points, moving further into record territory. The S&P 500 (+0.6%) had another record high close today, too. Meanwhile, the Russell 2000 jumped 3.5%, continuing its recent outperformance.

With today's gain, the Russell 2000 is 10.6% higher since the start of July. The S&P 500 and Nasdaq Composite are up 3.8% and 4.4%, respectively, over the same time.

Today's trade was a continuation of the broadening out exhibited in recent sessions, driven by momentum and a drop in market rates. The 10-yr note yield settled at 4.17%, down six basis points from yesterday, and the 2-yr note yield settled at 4.44%, down one basis point from yesterday.

Losses in the mega cap space acted as a limiting factor for the major indices. NVIDIA (NVDA 126.36, -2.08, -1.6%), Meta Platforms (META 489.79, -6.37, -1.3%), and Microsoft (MSFT 449.52, -4.44, -1.0%) were among the influential losers.

Buying activity was fairly robust elsewhere. The equal-weighted S&P 500 registered a 1.7% gain. Advancers had a 4-to-1 lead over decliners at the NYSE and a 7-to-2 lead at the Nasdaq.

The upside bias today was also supported by positive responses to some earnings news. Dow component UnitedHealth (UNH 548.87, +33.50, +6.5%) logged a sharp gain after its earnings report.

Bank of America (BAC 44.13, +2.24, +5.4%) and PNC Financials (PNC 176.98, +7.96, +4.7%) were top performers in the S&P 500 financial sector (+1.2%) following pleasing earnings news. Morgan Stanley (MS 106.22, +0.96, +0.9%) also logged an earnings-related gain.

Six other sectors in addition to the financial sector jumped at least 1.0% today. The industrial sector (+2.5%) registered the largest gain by a decent margin followed by materials (+2.0%). The heavily-weighted information technology (-0.4%) and communication services (-0.6%) sectors were alone in negative territory by the close.

Reviewing today's economic data:

• June Retail Sales 0.0% (Briefing.com consensus -0.1%); Prior was revised to 0.3% from 0.1%; June Retail Sales ex-auto 0.4% (Briefing.com consensus 0.2%); Prior was revised to 0.1% from -0.1%
  • The key takeaway from the report is that it conveyed some rather solid levels of discretionary spending on goods in June that belies any hard landing tracking for the economy.
• June Import Prices 0.0%; Prior was revised to -0.3% from -0.4% June Import Prices ex-oil 0.2%; Prior -0.3% June Export Prices -0.5%; Prior was revised to -0.7% from -0.6% June Export Prices ex-ag. -0.6%; Prior -0.8%
• May Business Inventories 0.5% (Briefing.com consensus 0.3%); Prior 0.3%
• July NAHB Housing Market Index 42 (Briefing.com consensus 44); Prior 43

Wednesday:

The S&P 500 (-1.4%), Russell 2000 (-1.1%), and Nasdaq Composite (-2.8%) exhibited some consolidation today after recent gains. Mega cap stocks and chipmakers, which have been influential winners all year, registered outsized declines today and weighed on the broader market.

NVIDIA (NVDA 117.99, -8.37, -6.6%), Meta Platforms (META 461.99, -27.80, -5.7%), Apple (AAPL 228.88, -5.94, -2.5%), and Broadcom (AVGO 155.98, -13.39, -7.9%) were among the standouts in that respect. The Vanguard Mega Cap Growth ETF (MGK) declined 2.8% and the PHLX Semiconductor Index (SOX) slid 6.8%.

Semiconductor stocks were also reacting to a Bloomberg report that the Biden Administration is discussing tightening export restrictions to China even further.

The price-weighed Dow Jones Industrial Average closed 0.6% higher, boosted by Johnson & Johnson (JNJ 156.58, +5.57, +3.7%) after its Q2 earnings report, and UnitedHealth (UNH 573.28, +24.41, +4.5%), which was upgraded at Jefferies to Buy from Hold after yesterday's sharp earnings-related gain.

Bank stocks also outperformed the rest of the market. The SPDR S&P Regional Bank ETF (KRE) jumped 1.2% and the SPDR S&P Bank ETF (KBE) closed 0.9% higher. The S&P 500 financial sector was among the top performers today, logging a 0.9% gain.

The activity in mega caps and chipmakers led the information technology (-3.7%) and communication services (-2.1%) sectors sharply lower.

The equity and bond markets didn't react much to the Fed's July Beige Book, which showed that economic activity maintained a slight to modest pace of growth in a majority of Districts this reporting cycle. The 2-yr note yield declined one basis point to 4.43% and the 10-yr note yield declined two basis points to 4.15%. This also followed a solid $13 billion 20-yr bond reopening.

Reviewing today's economic data:

• Weekly MBA Mortgage Applications Index 3.9%; Prior -0.2%
• June Housing Starts 1.353 mln (Briefing.com consensus 1.310 mln); Prior was revised to 1.314 mln from 1.277 mln; June Building Permits 1.446 mln (Briefing.com consensus 1.391 mln); Prior was revised to 1.399 mln from 1.386 mln
  • The key takeaway from the report is that, while it might have been better than expected relative to consensus estimates, it was not a strong report nor a particularly encouraging report for an inventory-constrained housing market in need of lower-priced, single-family homes.
• June Industrial Production 0.6% (Briefing.com consensus 0.3%); Prior was revised to 0.9% from 0.7%; June Capacity Utilization 78.8% (Briefing.com consensus 78.6%); Prior was revised to 78.3% from 78.2%
• The key takeaway from the report was the continued increase in manufacturing output, which fits with an economy that isn't pacing for a hard landing.

Thursday:

The S&P 500 (-0.8%), Nasdaq Composite (-0.7%), Dow Jones Industrial Average (-1.3%), and Russell 2000 (-1.9%) all closed near their worst levels of the session with solid losses. Decliners led advancers by a 7-to-2 margin at both the NYSE and at the Nasdaq.

Mixed action in the mega cap and semiconductor spaces contributed to mixed action at the index level in early trading. Ultimately, many stocks finished lower on the day or pulled back from early highs, including mega cap and semiconductor names. The Vanguard Mega Cap Growth ETF (MGK) closed 0.9% lower and the PHLX Semiconductor Index (SOX), which had been up as much as 1.9%, closed just 0.5% higher than yesterday.

Apple (AAPL 224.18, -4.70, -2.1%), Microsoft (MSFT 440.37, -3.15, -0.7%), and Amazon.com (AMZN 183.75, -4.17, -2.2%) were among the influential losers due to ongoing profit-taking activity.

Domino's Pizza (DPZ 409.04, -64.23, -13.6%) was another notable laggard, registering the steepest decline among S&P 500 components after reporting earnings. This price action, along with the decline in AMZN, contributed to the underperformance of the S&P 500 consumer discretionary sector (-1.3%).

A solid earnings-related gain in D.R. Horton (DHI 173.42, +16.91, +10.1%) and other homebuilder stocks provided some offsetting support in the consumer discretionary sector.

The health care (-2.3%) and financial (-1.3%) sectors were also among the top laggards. Meanwhile, the energy sector (+0.3%) was alone in positive territory by the close.

The 10-yr note yield settled four basis points higher at 4.19% and the 2-yr note yield settled three basis points higher at 4.46%. The bond and equity markets were little changed by this morning's release of a weekly jobless claims report that showed a sizable increase in initial claims.

Reviewing today's economic data:

• Weekly Initial Claims 243K (Briefing.com consensus 225K); Prior was revised to 223K from 222K; Weekly Continuing Claims 1.867 mln; Prior was revised to 1.847 mln from 1.852 mln
  • The key takeaway from the report is that it fits with the view that there is some softening in the labor market, which is a trend that will massage the market's belief that the Fed is likely to cut the target range for the fed funds rate before the end of the year.
• July Philadelphia Fed Index 13.9 (Briefing.com consensus 2.9); Prior 1.3
• June Leading Indicators -0.2% (Briefing.com consensus -0.3%); Prior was revised to -0.4% from -0.5%

Friday:

A technical update by CrowdStrike (CRWD 304.96, -38.09, -11.1%) that had a flaw in it wreaked havoc around the globe today since it infiltrated Microsoft's (MSFT 437.11, -3.26, -0.7%) operating system and left IT managers scrambling to implement a fix that would get things running smoothly again after CrowdStrike identified the flaw and rolled back its update.

Reports indicated that there were major disruptions at airports around the world, that emergency management systems were not functioning properly, and that media companies, as well as many other businesses, had their normal business operations disrupted.

This upheaval set the tone for what was an otherwise underwhelming day for the stock market, which was saddled with negative responses to the earnings reports from Netflix (NFLX 633.34, -9.70, -1.5%), and Dow components American Express (AXP 242.52, -6.68, -2.7%) and Travelers (TRV 203.54, -17.06, -7.7%), along with a general sense that the stock market is in the midst of a consolidation period after its spirited run to record highs.

The latter has manifested itself in the mega-cap stocks, which were once again unable to hold a buy-the-dip trade today. The Vanguard Mega-Cap Growth ETF (MGK) had been up as much as 0.6% but finished with a 0.6% loss, leaving it down 4.0% for the week.

Similarly, the Philadelphia Semiconductor Index ran into more selling pressure. It declined 3.1% today, finishing at its lows, and was down 8.8% for the week.

Notwithstanding the losses registered by the major indices, there wasn't any concerted selling interest outside the semiconductor group and some individual stocks with news. The affliction for the market was that there wasn't any conviction on the part of buyers.

Decliners led advancers by a 9-to-5 margin at the NYSE and by a roughly 13-to-7 margin at the Nasdaq.

Nine of the 11 S&P 500 sectors finished lower with losses ranging from 0.1% (real estate) to 1.3% (information technology and energy). The health care sector (+0.5%) was a winning standout and the utilities sector (+0.1%) also qualified as a relative strength leader. The equal-weighted S&P 500 declined 0.7%, matching the loss for the market-cap weighted S&P 500, and the Russell 2000 fell 0.6%.

The 2-yr note yield increased five basis points to 4.51% and the 10-yr note yield increased five basis points to 4.24%. There was no U.S. economic data of note today.