Equities rallied on the week, led by a surge in small caps. The S&P 500 gained a solid 2.2% on the week, but the laggard Russell 2000 rocketed more than 6%. There was a massive rotation within equities as momentum names were hit extremely hard and forgotten value names surged.
Second quarter GDP revisions show slower growth than was expected. The revision shows GDP growth of 2%. This is down from the initial reading of 2.1%. The downward revision is due to lower than expected local government spending, exports, private inventory investment, and residential investment. Strong personal consumption expenditure (PCE) was the major positive contributor to the growth.
The S&P 500 fell 1.2% on the week aided by a 2.6% drop on Friday where both China and the United States increased retaliatory tariffs. Small cap equities continue to be weak and fell 2.5% on the week. Small cap equities have underperformed the S&P 500 by 10% over the last six months.
Markets traded up 2.7% after last week’s trade off. Some of the pop may be attributed to the strength in earnings reports for retail companies this week. Retail is not dead yet, and it looks like traditional retail companies are gearing up for a marathon. Most of the growth in retail sales came from e-commerce, which is expected.
The S&P 500 fell 2.9% on Wednesday, the second occurrence this month, and erased previous gains for the week. The index is down about 6% from highs reached in July. Emerging Markets continue to lag and are down more than 24% from their high set back in January 2018. Gold continues to be one of the best performing assets as it benefits from the big drop in real yields.
Markets have been all over the place this week. The “place” in this context meaning down. The S&P 500 Index saw its worst day this year on Monday, trading down 3%. A presidential tweet last Thursday precipitated the decline in equity prices. The tweet announced plans to impose 10% tariffs starting September 1 on $300 billion in Chinese exports.
The S&P 500 fell 1.3% on the week with the bulk of the drop following the Federal Open Market Committee (FOMC) interest rate decision. Domestic small caps outperformed large caps on the week, but foreign equities underperformed. The dollar rallied, gold dropped, and the Barclays Aggregate Bond Index eked out a small gain.
Second quarter earnings reports continued to come in this week with 30% of S&P 500 companies reporting. Things are looking better than expected. Earnings growth for the period has been less negative than expected. Not positive, just less negative. The reports show earnings contraction of 0.1%. This is 5.1% better than expected.
The Consumer Price Index (CPI) number for June came in this week. The month-over-month price increase was higher than expected at 0.3%, excluding food and energy. The previous month’s CPI numbers have been pretty anemic. This is the largest increase in core CPI in the last 18 months. The expectation was for June’s number to be the same as May’s – 0.1%.
There was a major milestone this week as the S&P 500 Index briefly crossed the 3000 mark. The positive returns come on the heels of investors expecting the Federal Reserve to cut rates. Fed Chair, Jerome Powell, indicated in his Capitol Hill testimony on Wednesday the Fed was ready to cut rates as appropriate to sustain the expansion.