2024 | July 22

The Markets

Stocks Pull Back

The NASDAQ fell nearly 4%, snapping a six-week string of gains as several of the index’s mega-cap technology stocks slid for the second week in a row. The S&P 500 sustained a smaller weekly decline of around 2%, while the Dow was an outlier with a nearly 1% gain. 

For the second week in a row, a U.S. small-cap stock benchmark outperformed by a wide margin, posting a 1.7% total return while its large-cap counterpart fell 1.8%. The Russell 2000 Index’s surge of 7.7% over two weeks was the clearest indicator of a rotation toward market segments seen as being the biggest beneficiaries of potential interest-rate cuts.

In a week of choppy trading, an index that tracks investors’ expectations for short-term U.S. stock market volatility rose to the highest level in nearly three months. The CBOE Volatility Index (VIX) climbed 32% for the week to its highest level since April 22, when the so-called VIX was near its year-to-date high.

The second week of quarterly earnings season produced an uptick in expectations. Based on initial results and forecasts for upcoming reports, analysts on Friday were expecting S&P 500 companies to post an average second-quarter earnings increase of 9.7% compared with the same quarter a year earlier, according to FactSet. Just a week earlier, the projected growth rate was 9.1%.

U.S. retail sales were unchanged in June relative to the previous month, beating the consensus forecast of economists, who had expected a sales decline of around 0.4%. However, another indicator came in worse than expected, as the latest weekly count of initial unemployment claims rose to 243,000. That figure was identical to the count from a weekly report last month, when the total was the highest since August 2023.

The European Central Bank kept its key interest rate unchanged, staying in a holding pattern for now after ordering an initial rate cut at a meeting last month. The bank’s rate cut in June widened a policy gap with the U.S. Federal Reserve, which hasn’t yet cut its key lending rate below its currently high level.

Thursday’s scheduled release of the U.S. government’s initial estimate of second-quarter GDP is expected to show that the economy accelerated relative to the first quarter, when GDP grew at a 1.4% annual rate. An estimate released on Wednesday by U.S. Federal Reserve economists projected a second-quarter growth rate of 2.7%.

Source: John Hancock Investment Management

Stock Market Pullbacks

Microchip Companies Stumbled Over Government Policy

In general, one aim of governments in democratic countries is to implement policies that promote solid and sustainable economic growth. Sometimes, a policy change—or the possibility of one—will ripple through financial markets. Last week, we saw two examples of this as companies that have benefited from enthusiasm around artificial intelligence saw their share prices drop sharply when it appeared that U.S. government policy might change.

1. Stricter limits could be imposed on some exports to China. In one case, a potential change in government policy caused the share price of a Dutch company to drop, reported Adam Clark of Barron’s. The company produces lithography machines that are necessary for semiconductor manufacturing. The company’s solid second quarter earnings report was overshadowed by news that President Biden may impose new restrictions on exports to China. Clark reported that the administration:

“…is considering more severe trade restrictions on exports to China if companies…continue selling chip-making machinery to the country. While the [lithography machinery] company is already restricted from selling its most advanced machines to Chinese customers, [the company] still generated 49% of its revenue from China in the second quarter, as buyers looked to stock up on older machinery.”

2. The United States’ relationship with Taiwan may change. In an interview with Bloomberg Businessweek, presidential candidate Donald Trump was asked about the United States’ relationship with Taiwan. He answered, “They did take about 100 [percent] of our chip business. I think, Taiwan should pay us for defense.”

After the remarks became public, the share price of Taiwan’s largest company—the world's largest maker of advanced chips—tumbled, reported George Glover of Barron’s. The share price fell even though the company had beaten quarterly estimates and lifted 2024 revenue projections, reported Jane Lanhee Lee of Bloomberg.

Other chip companies’ stocks moved lower, too, on concerns that a change in U.S. policy could result in new supply chain disruptions. “China’s ruling Communist Party has vowed to ‘reunify’ with Taiwan and has refused to rule out using military force to take back control of the country,” reported Glover.

It can be dismaying when the value of a stock or stock market index moves lower. However, falling share prices sometimes have silver linings. They sometimes create opportunities to invest in companies with solid fundamentals at attractive prices. 

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