July’s ‘furious rotation’ was a catch-up for global equities that lagged in Q2 – DataTrek

July saw a sharp drop in interest rates, causing a “violent turnover” in cyclical and interest rate-sensitive sectors such as small caps in the US (VB), (IJR), (SCHA), (IWM), as well as Europe (IEUR) and Japan (EWJ).

Both two-year (US2Y) and ten-year (US10Y) Treasury bondsYields fell from 4.72% and 4.34% to 4.26% and 4.03%, respectively, over the past month. The current yields are the lowest since February and March.

“These sharp declines have been the primary driver of U.S. stock market moves this month,” wrote Nicholas Colas, co-founder of DataTrek, in a report for Community Plus. “Investors now believe that the U.S. economy will experience a soft landing, and that Fed rate cuts will keep growth steady over the coming quarters.”

He said investors now feel safer allocating capital elsewhere besides the big tech names (AAPL), (MSFT), (NVDA), (GOOG), (AMZN), (META), (CRM).

The Russell 200 (IWM) rose 10.1%, the S&P 600 (SP600) gained 11%, and the S&P Mid Cap 400 (SP400) gained 5.8%. Even the S&P 1500 (SPTM) rose more than the S&P 500 (SP500), up 1.7% versus 1.1%.

Non-US stocks (NASDAQ:ACWX) posted modest gains this month, up 2.2% in July and 6.3% year-to-date. Europe (IEUR) and Japan (EWJ) outperformed the S&P 500 (SP500) — up 2.5% and 4%, respectively, compared with 1.1% for the S&P 500 — but emerging markets (EEM) lagged, up just 0.8%.

In the US stock market, price-sensitive groups such as financials (XLF), real estate (XLRE), and utilities (XLU) led the market, while technology (XLK) and technology-related groups lagged.

“As a result, value outperformed growth, and minimum volatility/dividend yields outperformed the S&P 500,” Colas said. “July was a catch-up month for areas of the global equity market that lagged in the second quarter.”

Finally, Colas said that because U.S. interest rates fell in July, “it would have been reasonable to expect more catch-up trading in non-U.S. equities (ACWX), but that has not happened. We believe the continued relative strength of the U.S. economy explains this deviation from historical norms.”