Expanding Stock Rally Shows Signs of Economic Resilience and Diversification
The U.S. stock market rally is demonstrating encouraging signs of diversification beyond the dominant growth and tech names that have led the gains this year. Investors are reshaping their portfolios in anticipation of a widely expected recession, prompting a shift towards economically sensitive market areas that have been overlooked thus far, including small-cap stocks, energy shares, and industrial stocks. These segments have experienced substantial rallies in June.
Tim Murray, a capital market strategist in T Rowe Price’s multi-asset division, observed, “We’re seeing indications that the economy is going to be more resilient to headwinds. There’s reason to believe that the pessimism we saw at the start of the year is giving way to a stronger-than-expected market.” Murray has increased his allocation to small-cap stocks, which are poised to benefit directly from economic growth. The Russell 2000 small-cap index has surged by 6.6% this month and is up 5.9% year-to-date. Additionally, the energy sector of the S&P 500 has gained 6% this month, while industrials have risen nearly 4%. Despite the recent underperformance, the tech-heavy Nasdaq 100 has still achieved a 2% increase this month, following an impressive 33% surge year-to-date driven by advancements in artificial intelligence.
The broadening equity rally is a welcome development for many investors concerned about the market’s narrow leadership. Notably, only seven stocks, including Apple, Microsoft, Alphabet, Amazon.com, Nvidia, Meta Platforms, and Tesla, have accounted for nearly all of the NASDAQ’s gains this year. However, this dominance is beginning to change, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
The market’s breadth is also indicative of investors exploring opportunities beyond the usual suspects. The percentage of S&P 500 stocks trading above their 200-day moving average has risen to nearly 54% in June, compared to a low of 38% in March. While still lower than the high of 76% reached in February, this increase showcases a growing interest in a wider range of stocks.
Investors’ economic outlook has been bolstered by stronger-than-expected jobs growth and robust consumer spending. Notably, Goldman Sachs revised down its probability of a recession in the next 12 months from 35% to 25%, while Nuveen’s Chief Investment Officer, Saira Malik, predicts that a “mild” recession, initially expected in late 2023, is now likely to occur in 2024.
In the upcoming week, investors will closely monitor U.S. consumer price data to assess the impact of the Federal Reserve’s rate hikes on inflation and growth. The Fed’s two-day monetary policy meeting, concluding on Wednesday, will also be closely watched to gauge policymakers’ stance on future tightening. Although some market analysts believe it is premature to embrace economic optimism, others, such as Max Wasserman, senior portfolio manager at Miramar Capital, remain positive. Wasserman has been increasing positions in underperforming consumer stocks like Starbucks Corp and Target Corp, anticipating that restaurants and retailers will outperform as growth stabilizes in the second half of the year.
Disclaimer: The content provided in this article is for informational purposes only and should not be considered financial advice. Always conduct thorough research and consult with a qualified professional before making investment decisions.
