Market Movers & Shakers

Market dynamics have changed quite a bit since our last edition of Notes from the Trading Desk was released at the end of June. The first week and a half of July saw continued strength in the largest technology stocks that market participants have heard about ad nauseum for much of the last 18 months. Both the S&P 500 and the Nasdaq Composite began the month on a 7-day winning streak, with the former trading above 5,600 for the first time ever. Then the tides of the market began to shift following June’s CPI report which crossed the wires on July 11th. The inflation report came in cooler than economists had forecasted, as core CPI rose just 0.1% from May, marking the lowest month-over-month increase since August 2021 and taking the annualized core inflation rate down to a three-year low of 3.3%. One of the most encouraging takeaways from the report was the slowdown in the pace of shelter inflation, which accounts for roughly one-third of the overall consumer price index and tends to move with a significant lag to real-time market rents. June’s 0.2% increase in the shelter index was the slowest increase in nearly three years. June’s CPI disinflation took odds for a September interest rate cut to above 90% immediately following the report and sparked a rotation from the Magnificent Seven and AI related technology stocks into small caps and more value-oriented segments of the market. In fact, the rotation out of large caps and into small caps was so sharp on the day of the inflation report that the Russell 2000 outperformed the S&P 500 by 450 basis points, the 2nd largest daily outperformance of small caps to large caps on record.

While previous one-day rallies in small cap stocks over the past 18 months had proven to be head fakes, the rotation that began earlier this month has shown itself to have more staying power. The equal-weight S&P 500 and the small cap Russell 2000 have since outperformed the market-cap weighted S&P 500 for three straight weeks. Selling across large-cap technology stocks continued more recently following earnings reports from Tesla and Google’s parent company, Alphabet, which both highlighted increased capital expenditures related to AI investments. Concerns are mounting on Wall Street about the substantial investments companies are making to enhance their AI capabilities, given the lack of a clear strategy for how these investments will generate sufficient future profits to justify the current spending levels. The S&P 500 closed 2.31% lower while the Nasdaq fell 3.64% following the earnings releases — the indices’ worst day of the year and largest single day declines since 2022. The Roundhill Magnificent Seven ETF (MAGS) slid 6.06% on the day. The Magnificent Seven stocks are now collectively down nearly 13% since their peak on July 10th, while the Russell 2000 is up just about 10% over the same period. Volatility, as measured by the VIX, spiked amid the latest selloff, hitting the highest levels since April of this year. The S&P 500 snapped a 356 consecutive trading day streak without a 2% drop while the Nasdaq broke a 400-trading day streak without a 3% decline. Both indices are now negative for the quarter, though still sport robust year-to-date gains.

A flood of economic data was released in July. June’s nonfarm payrolls report, released at the start of the month, revealed that the unemployment rate increased to 4.1%, the highest level since October 2021, as the labor force participation rate ticked higher. The U-6 unemployment rate, which counts discouraged workers and those holding part-time jobs for economic reasons, held at a seasonally adjusted rate of 7.4% for the third straight month. The report showcased a continued cooling of the U.S. labor market. Recent data from the Labor Department showed weekly jobless claims came in above 220,000 for the ninth straight week in a row. The four-week moving average of initial claims, which helps smooth out week-to-week volatility, edged up to just over 235,000. Continuing claims, a proxy for the number of people receiving unemployment benefits, rose to the highest levels since November 2021. In other economic news, second-quarter GDP numbers showed the U.S. economy grew at an annualized rate of 2.8%, exceeding forecasts for 2.1% growth during the quarter and well above a 1.4% increase in the first quarter. The Commerce Department’s report showed consumers increased their spending, businesses invested more in inventories and equipment, and inflation cooled during the second quarter. Speaking of inflation, June PCE data was released last week. Core PCE increased 0.2% month-over-month, slightly hotter than consensus estimates and above the previous month’s increase of 0.1%. On an annualized basis, core PCE increased 2.6%, unchanged from last month though slightly ahead of estimates for a 2.5% increase. Despite coming in marginally higher than forecasts, the report largely reflects disinflation traction and adds support to the Federal Reserve rate cut narrative. The 10-year U.S. Treasury yield has slid nearly 30 basis points since the start of July and now sits near 4.20% while the 2-year U.S. Treasury yield, which is generally more sensitive to changes in Fed Funds futures, has fallen 40 basis points during the month to around 4.35%. The recent move in yields has steepened the yield curve, which still remains inverted since early July 2022, marking the longest inversion on record, and has narrowed the spread between 2’s and 10’s. Market participants now turn their attention to the upcoming FOMC meeting and will be keenly focused on commentary that is widely anticipated to set the stage for an interest rate cut in September.

Updates & News*

The uptick in index-level volatility over the past few weeks coinciding with earnings season has provided Tandem with the opportunity to deploy cash across new accounts and accounts that have recently deposited funds. Accounts that have been with Tandem for about 2 weeks are roughly 45% of the way transitioned into our strategies, while those that have been here for a month are nearly two-thirds of the way in-line with our strategies.

Turning to the earnings front, as we approach the peak of earnings season for the quarter, the desk has certainly stayed busy reading through company reports and earnings call transcripts. Electronic component maker Amphenol reported a robust top and bottom line beat and announced a 50% increase in its quarterly dividend, from $0.11 a share to $0.165. BlackRock, the world’s largest asset manager, reported a record $10.6 trillion in assets under management in its second-quarter earnings report. BlackRock’s revenue increased 8% year-over-year while earnings rose 9% over the same period, as organic growth was driven by BlackRock’s private markets and ETF offerings. Insurance brokerage firm Brown & Brown reported a strong second quarter with revenue and earnings both coming in above analysts’ expectations. The company saw margin expansion during the quarter and logged 10% organic revenue growth driven by strong new business and customer retention. Comcast’s wireless business continues to be a key growth driver for the company. Domestic wireless customer lines increased 20% year-over-year while Comcast’s adjusted earnings per share increased 7.0% over the same time period. Fintech giant Fiserv reported strong Q2 results with 18% growth in both organic revenue and adjusted earnings per share alongside a 160 basis point expansion in operating margins. Fiserv’s credit card processing system for small businesses, Clover, grew revenues at 28% in the second quarter as the point-of-sale offering continues to see momentum. Republic Services announced an 8% increase in its quarterly dividend, marking the 21st consecutive year of dividend increases for the environmental services company as its core business continues to see positive momentum. And last but not least, Visa reported a quarter that was mostly in-line with analyst forecasts as revenues climbed 10% compared to a year ago. Payment volumes were up 7%, cross-border volume increased 14%, and processed transactions rose 10%. Visa processed a whopping $3.325 trillion in transactions on its network during the quarter, up 7.4% from a year ago, noting growth in Europe and Latin America.

Source: Source of all data is FactSet, unless otherwise noted.

*The transition level activity taken by Tandem is applicable to new accounts and new money, not the composite or firm-wide level. New accounts and new money are not automatically invested on the first day. Rather, they are transitioned into our strategy over a longer time period that is dependent upon market conditions. Strategy level activity is applicable to the composite and action is taken at the firm-wide level.

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This audio/writing is for informational purposes only and shall not constitute or be considered financial, tax or investment advice, or an offer to sell, or a solicitation of an offer to buy any product, service, or security. Tandem Investment Advisors, Inc. does not represent that the securities, products, or services discussed in this writing are suitable for any particular investor. Indices are unmanaged and not available for direct investment. Please consult your financial advisor before making any investment decisions. Past performance is no guarantee of future results. All past portfolio purchases and sales are available upon request.

All performance figures, data points, charts and graphs contained in this report are derived from publicly available sources believed to be reliable. Tandem makes no representation as to the accuracy of these numbers, nor should they be construed as any representation of past or future performance.