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Markets are Rotating out of Technology… What Does it Mean?: Market Commentary from Cabana’s CEO – July 26, 2024  

5 months ago

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We mentioned the long overdue rotation out of tech a couple of weeks ago and the likelihood that we would see the large market cap weighted indices (SPY and QQQ) suffer a pullback as a result. These indices have been the beneficiaries of the big tech AI phenomena for the past year and are now getting the other side of it. As I stated then, I believe this is healthy and gives us the opportunity for the bull market to reset and push higher into the year’s end. As I see it, we need other sectors beyond big tech to participate. It is market breadth that provides the sturdy foundation for bull markets and despite all the hoopla around “all-time highs”, market breadth has been all but nonexistent as of late. Most everything is still climbing out of the ditch that was the bear market of 2022-2023. Bonds remain underwater. I have provided a chart of the market cap weighted SPY vs the equal weight RSP and the aggregated bond index AGG for a visual reference of just how much tech has influenced returns since the beginning of 2022. Simply put, we need some money to leave the tech trade and support the more cyclical parts of our economy – even if that results in short-term pain. 

SPY, RSP and AGG via Stockcharts.com as of July 24, 2024:

I also want to comment on the yield curve beginning to un-invert (see chart below). As of Wednesday, July 24, we are only 13 basis points from the two- and ten-year treasury having the same yield (Investing.com). During the bond volatility of the past 24 months the two-year yield has been as much as 100 basis points higher than the ten year. The fact that we are seeing this normalization occur without a recession is a big deal and supports the idea that the Fed may actually pull off the “soft landing” many thought impossible. It isn’t over yet, but progress is being made in the bond market. I hope the Fed does not get greedy here and will begin cutting rates in September.

Yield Curve via Bloomberg as of July 24, 2024:

At Cabana, we remain bullish and are allocated accordingly across our portfolios.  

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January 17, 2024

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