The S&P 500 index of large U.S. stocks lost 2% last week, trimming its 2024 gains to 15%. However, last week was not necessarily bad for U.S. stocks generally. Different types of stocks – namely indexes of smaller companies and value stocks – shone brightly.
The Russell 2000 index of smaller stocks beat the S&P 500 over the seven days through last Wednesday by the largest margin during a period of that length since 1986. The Russell 1000 Value index, meanwhile, notched its biggest lead over its growth-stock counterpart since 2001. This “broadening” of stock performance, meaning better performance from stocks beyond the few big tech companies that have been powering the S&P 500 recently, is a welcome development. It implies deeper footing than just one sector of leadership.
The increasing likelihood of an interest rate cut by the Federal Reserve in September may be a reason for this. Smaller companies tend to be more vulnerable than big ones to high interest rates. Thus, a rate cut should be beneficial to smaller companies’ financials, all else being equal.
In our view, last week’s market rotation is reassuring for the longer run. We do not need to be reactionary to it in the short-term because we build portfolios to anticipate market action like this. For folks for whom stock investments are appropriate, it is often sensible to use a mixture of themes, such as large-cap and small-cap or domestic and international, to capture the different characteristics and potential of each.