SUMMARY

The market is on a notable upswing, with the MAG 7 stocks (TSLA, AAPL, AMZN, GOOG, MSFT, META, NVDA) leading the way. The ETF that focuses on these top stocks has seen an impressive 23.77% increase this year and a remarkable 34.52% increase over the past 12 months. In contrast, the equal-weighted S&P (RSP) has experienced a modest 5.10% increase this year and a 10.49% increase over the past 12 months (Source: Morningstar Total Price Returns). Although the AI-centric theme has persisted for the last 18 months, it appears that there is now a shift towards market sectors with more appealing valuations despite still being relatively high compared to historical levels. As we enter what seems to be a turbulent election season coinciding with a slowdown in economic data, it is anticipated that there will be increased volatility in the coming months. Nonetheless, the upward trend since the October 2022 lows remains intact, and our models continue to favor equities for the time being.

BROAD MARKET PERFORMANCE (AS OF 08/06/2024)

	YTD Performance	Trailing 1-Year Performance
SPY (SPDR S&P 500 ETF)	10.55%	18.51%
DIA (SPDR DJIA ETF)	4.44%	13.26%
QQQ (Nasdaq 100 ETF)	7.65%	18.96%
TLT (20+ Year US Treasury ETF)	-0.04%	4.03%
AGG (US Agg Bond ETF)	2.56%	6.78%
Table 1: Source: Morningstar

AI Themed Rally

Many of you are likely aware that the financial headlines have been focused on the top tech companies (Nvidia, Microsoft, Google, Meta (Facebook), Tesla, Apple, and Amazon) and other firms that are heavily investing in the AI space. These companies’ stock prices have driven the stock market higher, surpassing the value of any non-U.S. national stock market. Additionally, just a few weeks ago, the top 5 companies made up the largest portion of the S&P 500 in history.

**Figure 1: Five Largest Stocks in the S&P 500**

It’s fascinating how quickly a narrative can change. Many investors seem to have forgotten that these stocks were undesirable in 2022, considering the average maximum drawdown during the year was ‑52.19%, with several stocks plummeting by over -60%.

Ticker	2021 Closing Price	2022 Low Price	Drawdown
NVDA	29.41	10.81	-63.24%
MSFT	336.32	213.43	-36.54%
GOOG	144.68	83.45	-42.32%
META	336.35	88.09	-73.81%
TSLA	352.26	108.24	-69.27%
AAPL	177.57	125.87	-29.12%
AMZN	166.72	81.69	-51.00%
Source:	ThinkorSwim	Average	-52.19%
Figure 2: Magnificent 7 stock's 2022 max drawdown

After the positive June CPI report on July 10, there has been a noticeable shift in the market narrative. Expectations for interest rate cuts have increased, leading investors to move away from large AI-themed technology companies and towards “value-based” companies, such as traditional dividend-paying stocks and mid- to small market cap companies. These types of companies typically hold higher levels of debt and are more sensitive to interest rates. As a result, when rates decrease, their profit margins increase. After the CPI report, the iShares Select Dividend ETF (DVY) increased by more than +7%, the ETF tracking the Russell 2000 index (IWM), comprised of mid- and small-cap companies, increased by more than +10.5%, while the MAGS ETF, tracking the magnificent 7 stocks, decreased by roughly -11% (Source: ThinkorSwim). The chart below illustrates the significant outperformance of the Russell 2000 (small and mid-cap stocks) compared to the technology-heavy NASDAQ index in the days following the most recent CPI report. When the line is moving lower, technology stocks are outperforming, while the small and mid-cap stocks are outperforming when the line is moving higher.

**Figure 3: Russell/NASDAQ Relative Strength**

MACROECONOMIC VIEW

Recent economic reports have largely indicated a soft landing without a recession, but there are concerns about celebrating the Fed just yet. More recent economic data has shown some early signs of softening. Both manufacturing and services PMI data, which are leading indicators of economic growth, have started trending downward. The ISM Services Business Activity Index has also begun to decline. This index considers business activity, new orders, employment, and supplier deliveries.

**Figure 4: ISM Services Business Activity Index**

We have observed a decline in payrolls growth, wages, disposable income, and consumer confidence over the past few months. This trend has been mentioned several times in recent earnings calls by various retailers as they anticipate weaker consumer demand in the latter part of the year. Despite the early signs of a weaker consumer and a slowdown in economic growth, NDR’s Recession Probability Model is not yet indicating that we are in a recession. In fact, of the 10 indicators in the model, only the ISM Manufacturing PMI indicator is at a concerning level. We will continue to monitor the data trends, but until there is a change in the weight of the evidence, we remain constructive on the U.S. equity markets.

**Figure 5: NDR Recession Probability Model**

VALUATIONS

The S&P 500 has dropped by approximately -6.5% from its peak three weeks ago. This decline has led to a slight improvement in valuations, although they are still relatively high compared to the past 10 years. The chart below illustrates various valuation measures for the U.S. equity markets, including expected (forward) earnings, dividends, and cash flow. When yields are low, valuations are considered expensive, and vice versa. We prefer to assess earnings yields over price-to-earnings ratios, as the latter is influenced by not including negative earnings. The forward earnings yield is currently around 5%, while the 10-year average is approximately 5.5%. This suggests that U.S. equities are slightly overvalued compared to the past 10 years based on forward earnings expectations. A similar trend is observed across the other metrics as well. Although overall markets are currently expensive, there are still opportunities in areas of the market that have been overlooked by investors focusing heavily on the AI theme.

TECHNICALS/SENTIMENT

With the selloff of the S&P 500 that occurred on Friday and Monday (8/2 through 8/5), the well-known Volatility Index (VIX), intended to be a gauge of fear among investors based on options pricing, approached levels last seen during the low point of the 2020 Covid market selloff.

**Figure 7: CBOE Volatility Index (VIX)**

The CNN Fear & Greed Index, a well-known sentiment indicator, also showed “Extreme Fear” readings, which historically have often signaled near-term bottoms in the equity markets. According to NDR, when sentiment indicators have moved into “extreme fear” zones over the past 10 years, the market has had an average annual return of +17.76%. We took advantage of this opportunity to invest some cash in our Smart Value/Core Equity stock portfolios. Please refer to the trade notification we sent out for more details. If you didn’t receive this notification, please contact us to get a copy.

The current economic data is showing initial signs of a slowdown while stock valuations are elevated. However, our models still suggest a positive outlook for stocks for now. The recent market pullback has provided a short-term opportunity for tactical buying, as the market anticipates a Fed rate cut. We believe that the Fed is currently too restrictive, especially when considering real interest rates, and a rate cut would be favorable. The upcoming election season is expected to bring more market volatility. Although our models have slightly weakened, they still indicate a bullish outlook for stocks from their lows in the fourth quarter of 2022. If the models continue to weaken and indicate a need to reduce risk, we will act promptly.

As always, if you have not recently reviewed your financial plan, please reach out to Natalie Brown, CFP®, to schedule an appointment.

Have a great week,

Regan Teague, CFA®, CFP®
Senior Investment Officer & Financial Advisor
Day Hagan Private Wealth

—Written 8.7.2024

Natalie Brown, CFP®, Director of Client Services
Don Hagan, CFA®, Partner, Chief Investment Strategist
Art Day, Partner, Senior Portfolio Manager

Print PDF Copy of the Article: Day Hagan Private Wealth Market Update: Market Update August 7, 2024 (pdf)

Disclosure: The data and analysis contained herein are provided “as is” and without warranty of any kind, either express or implied. Day Hagan Private Wealth (DHPW), any of its affiliates or employees, or any third-party data provider shall not have any liability for any loss sustained by anyone who has relied on the information contained in any Day Hagan Private Wealth literature or marketing materials. All opinions expressed herein are subject to change without notice, and you should always obtain current information and perform due diligence before investing. DHPW accounts that DHPW or its affiliated companies manage, or their respective shareholders, directors, officers, and/or employees, may have long or short positions in the securities discussed herein and may purchase or sell such securities without notice. The securities mentioned in this document may not be eligible for sale in some states or countries nor be suitable for all types of investors; their value and income they produce may fluctuate and/or be adversely affected by exchange rates, interest rates, or other factors.

Investment advisory services are offered through Donald L. Hagan, LLC, an SEC-registered investment advisory firm. Accounts held at Raymond James and Associates, Inc. (member FINRA, SIPC) and Charles Schwab & Co., Inc. (member FINRA, SIPC). Day Hagan Asset Management and Day Hagan Private Wealth are both dbas of Donald L. Hagan, LLC.

MARKET UPDATE AUGUST 7, 2024