The S&P 500 (SP500) on Wednesday climbed 1.13% for July to close at 5,522.30 points, its smallest monthly advance since May 2023. Its accompanying SPDR S&P 500 ETF Trust (NYSEARCA:SPY) was up 1.21% for the same period.
July was a tale of two halves for the benchmark index. The S&P (SP500) added 3.78% from June 28 to July 16 to set a record closing high at 5,667.21 points. The gauge then fell 2.56% for the rest of the month.
From dramatic developments in the U.S. presidential election race, to a near-obsession with when the Federal Reserve would be able to cut interest rates, to the word “rotation” dominating trading chatter, it was an eventful month, to say the least.
The first week of July saw the S&P 500 (SP500) come within striking distance of 5,600 points, as sentiment was driven by a June nonfarm payrolls report that showed slowing jobs growth, pointing to the signs of cooling in the highly resilient labor market that the Fed wants to see.
The second week of the month saw the S&P (SP500) take out the 5,600 level, following the release of favorable inflation data. Coupled with the labor market indicators, traders ramped up their bets that the Fed would be able to start easing monetary policy in September.
On July 13, former U.S. President Donald Trump survived an assassination attempt while addressing a campaign rally. The event thrust the presidential race into the spotlight, and a “Trump trade” helped the S&P (SP500) close at its aforementioned record high on July 16.
The third week of July saw the S&P (SP500) post its worst weekly performance since mid-April. The retreat was largely driven by a rotation out of technology stocks that was sparked by the June consumer price index report and the “Trump trade.”
Boosted by the excitement over artificial intelligence (AI), chip companies and the “Magnificent 7” club have been primary drivers of Wall Street’s current bull run. But with labor market and inflation data moving in the right direction, and a growing expectation that the Fed will cut interest rates, investors have obtained the confidence to move out of the technology sector and into other assets such as defensive sectors and small-cap stocks.
Technology names kept bleeding in the fourth week of July as well. Tesla (TSLA) and Alphabet (GOOG)(GOOGL) disappointed Wall Street with their quarterly reports, and so did Microsoft (MSFT) on Wednesday. The latter two tech behemoths in particular concerned investors with their levels of spending on AI.
As evidence for the rotation trade, note that the S&P 500 equal weight index’s 4.39% increase for July is much higher than the S&P 500’s (SP500) 1.13%. The equal weight index includes the same constituents as the capitalization weighted S&P 500, but each company in the equal weight gauge is allocated a fixed weight, meaning that the likes of Nvidia (NVDA) carry the same heft as Dollar Tree (DLTR).
Also note, the barometer for small-caps, the Russell 2000 (RTY), has surged 10.44% for the month.
July’s fourth week also saw another major twist in the U.S. election saga, with incumbent President Joe Biden confirming that he was withdrawing from the Democratic presidential nomination and endorsing Vice President Kamala Harris instead.
The month ended on a positive note on Wednesday, with the Fed living up to market expectations and signaling that if labor market and inflation data continued to improve, a policy rate cut “could be on the table as soon as September.”
Turning to the monthly performance of the S&P 500 (SP500) sectors, nine of the 11 ended in the green. In another evidence for the rotation trade, defensive names Real Estate and Utilities saw outsized gains of nearly 7% each. Communication Services and Technology were the two losers. See below a breakdown of the performance of the sectors as well as their accompanying SPDR Select Sector ETFs from June 28 close to July 31 close:
#1: Real Estate +6.92%, and the Real Estate Select Sector SPDR Fund ETF (XLRE) +7.24%.
#2: Utilities +6.73%, and the Utilities Select Sector SPDR Fund ETF (XLU) +6.82%.
#3: Financials +6.31%, and the Financial Select Sector SPDR Fund ETF (XLF) +6.40%.
#4: Industrials +4.84%, and the Industrial Select Sector SPDR Fund ETF (XLI) +4.92%.
#5: Materials +4.31%, and the Materials Select Sector SPDR Fund ETF (XLB) +4.34%.
#6: Health Care +2.49%, and the Health Care Select Sector SPDR Fund ETF (XLV) +2.66%.
#7: Energy +2.03%, and the Energy Select Sector SPDR Fund ETF (XLE) +2.26%.
#8: Consumer Staples +1.77%, and the Consumer Staples Select Sector SPDR Fund ETF (XLP) +1.66%.
#9: Consumer Discretionary +1.64%, and the Consumer Discretionary Select Sector SPDR ETF (XLY) +2.79%.
#10: Information Technology -2.12%, and the Technology Select Sector SPDR Fund ETF (XLK) -3.28%.
#11: Communication Services -4.16%, and the Communication Services Select Sector SPDR Fund (XLC) +0.15%.
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