From Washington to Wall Street, it's Sink or Swim
By John Persinos
"You better start swimmin' or you'll sink like a stone." — Bob Dylan
As the race for the White House gets a twist worthy of primetime drama, the stock market is taking a dramatic turn as well. We're seeing big rotations, in Washington and on Wall Street. Below, I'll show you how to trade amid these treacherous crosscurrents.
President Biden's unexpected exit from the presidential race upended the political world. Vice President Kamala Harris, now the presumptive Democratic nominee, has narrowed the gap with former frontrunner Donald Trump. There hasn't been a disruption in presidential politics this stunning since Lyndon Johnson abruptly dropped out in 1968.
At the same time, the once-dominant mega-cap technology stocks have begun to lag, while value and cyclical stocks, particularly small- and mid-caps, have surged.
The broader economic context remains favorable for equity investors. With economic growth moderating but remaining positive, inflation easing, and the Federal Reserve poised to lower interest rates, market and political volatility present opportunities for portfolio diversification.
The equity markets have continued a rotation that began earlier this month, with value and cyclical sectors outperforming the household names in Silicon Valley. This shift comes after over a year of dominance by large-cap growth sectors, particularly the "Magnificent Seven." Several factors are driving this rotation.
Cooler-than-expected inflation data, particularly the consumer price index (CPI) report from July 11, has played a pivotal role. The trend was confirmed last week with the latest data for the personal consumption expenditures price index (PCE).
With headline CPI inflation now at 3.0% year-over-year, the markets are increasingly pricing in the likelihood of Fed interest rate cuts in the latter half of this year.
The CME FedWatch tool indicates that three rate cuts are anticipated in September, November, and December. This trend of disinflation, despite fluctuations, supports the broadening of market leadership.
Last week's stock market action further confirms that rotation is underway (see chart).
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