July 20, 2024 Market Update

The great rotation that began a week ago Thursday continued last week, with small caps being a primary beneficiary.  However, as the week progressed, the mega-cap tech selloff began to spread to other sectors of the market pairing back most of the gains posted earlier in the week.  Hampered by the global IT outage on Friday, the tech-heavy Nasdaq and the S&P 500 Index were down 3.65% and 2%, respectively, by weeks’ end.  The Dow Jones, on the other hand, managed to post a modest 0.7% gain for the week while investors in the Russell 2000 small cap index enjoyed a 1.68% rise.

Meanwhile, the U.S. bond market exhibited a mixed performance across various segments.  While Treasury yields increased, the high-yield corporate and municipal bond markets performed well, supported by strong demand and inflows.  The Vanguard Total Bond Market ETF (BND), a proxy for the overall bond market, dropped 0.36%. 

Mr. Market is convinced that the Fed will start to cut interest rates by September and will cut rates again in December.  As of Friday’s close, the financial markets were putting the odds of a September rate cut at close to 100%.  The market is also expecting an additional rate cut in December, and four more rate cuts next year, which would leave the Federal Funds rate at 3.75%-4.0%.

How would these rate cuts impact the bond market if they were to in fact occur?  The following table, provided by Charlie Bilieo of Creative Planning suggests it would be bullish.

Overall, the bond market appears poised for a positive performance in the second half of the year, given the expected rate cuts, attractive yields, and resilient economic conditions.  Those, combined with the traditional diversification benefits of bonds, suggests this may be an opportune time for investors to increase their portfolio’s allocation to high quality mid-term bonds.

That’s all for now.  Have a great weekend and invest wisely my friends.