Market Review 22nd July 2024

In a surprising turn of events, Wall Street experienced a robust recovery on Monday, led by a rebound in technology stocks following their worst week in months. The S&P 500 climbed over 1%, while the Nasdaq surged 1.6%, breaking a three-day losing streak. This recovery came on the heels of significant political news: President Joe Biden announced he would not seek re-election, endorsing Vice President Kamala Harris as the Democratic nominee.

Tech's Comeback

After a tumultuous week where investors fled from high-flying tech stocks in favor of smaller companies, Monday saw a resurgence in tech favorites. Nvidia, in particular, shone brightly after reports indicated the chipmaker was developing AI chips compatible with U.S. export controls to China. This news boosted other semiconductor stocks, contributing to the tech sector's overall recovery.

Political Landscape and Market Reaction

Biden's unexpected withdrawal from the presidential race injected a dose of uncertainty into the political landscape. However, markets took the news in stride, with the S&P 500 gaining over 1% and the TSX posting a 0.8% gain. Analysts suggest this positive response reflects a belief that the upcoming Democratic nominee will not dramatically alter the current policy landscape, particularly regarding taxes and tariffs.

Small-Cap Rally Continues

While tech stocks bounced back, the rally in small-cap stocks also persisted. The Russell 2000 Index, which focuses on smaller companies, gained over 1.5%. This continued outperformance is partly attributed to hopes of deregulation and the anticipated start of the Federal Reserve's rate-cutting cycle.

Expert Takeaways

1. Stable Policy Expectations: Despite the political shake-up, the market does not expect significant policy changes from the new Democratic nominee. Taxes and tariffs will remain key issues, with the potential for deregulation and lower taxes from the Republican side.

2. Short-Term Volatility: The selection process for the new Democratic nominee could introduce short-term market volatility, historically peaking around two months before the election and subsiding afterward.

3. Positive Investment Backdrop: Rising corporate profits, continued economic expansion, and potential Fed rate cuts create a favorable environment for markets. Investors are encouraged to view short-term pullbacks as opportunities to invest in quality assets aligned with their long-term goals.

Fundamentals Over Politics

While political events can cause short-term market fluctuations, experts advise against making investment decisions based solely on political developments. Historical data shows that fundamental factors such as economic growth, interest rates, and corporate earnings are more powerful drivers of market performance. For instance, despite differing political approaches to China, the MSCI China Index saw significant gains under Trump and declines under Biden, underscoring the importance of fundamental market forces.

Upcoming Events

Looking ahead, the Bank of Canada's meeting on Wednesday will be a focal point for markets. June's lower-than-expected inflation reading and a soft retail-sales report suggest another rate cut might be on the horizon. Additionally, the earnings season is in full swing, with about 30% of the S&P 500 set to report this week. Analysts expect strong profit growth, particularly in the communication services, information technology, financials, and health care sectors.

Conclusion

As Wall Street navigates the political shifts and economic signals, the market's resilience reflects investor confidence in a stable policy environment and robust economic fundamentals. With a positive investment backdrop and healthy profit growth anticipated across multiple sectors, the current bull market looks set to extend its run, offering opportunities for savvy investors to capitalize on short-term pullbacks and market volatility.

Wall Street Bounces Back as Tech Rebounds Amid Political Shake-Up