First Rate Cut - Stocks Could Return Just 2% In The Year Following

First Rate Cut - Stocks Digest Gains

Before getting into the effects of the First Rate Cut, let's review the current market conditions. On Friday the stock market had a modest selloff as it digested the gains of the week and the record high on Thursday. S&P 500 fell 0.13% and VIX rose 4.41% to 15.4. 

That’s a relatively elevated VIX for such a great first half and a great month for stocks. There has been more volatility than 2017 already, but the market is on pace to trounce the gains in that placid year.

CNN fear and greed index spiked 7 points despite the decline in stocks as it is now at 52 out of 100 which is neutral. On Friday the index that measures difference in 20-day stock and bond returns went from fear to greed. CBOE 5 day average put to call ratio went from neutral to greed. 

Most sentiment indicators are in neutral which is surprising given the rally. Fears of a recession are still prevalent. While those fears are preventing euphoria, that doesn’t mean stocks won’t sell off if there is a recession.

Small Caps Underperform

To give context to how great the rally has been this year, the S&P 500 hasn’t been up 15% year to date heading into the last week of the first half since 1998. 

On Friday, Nasdaq fell 0.24% and Russell 2000 fell 0.89%. Neither have reached a new record high yet. There’s something to be said about having them hit a record high and tS&P 500 getting out of this triple top range.

Russell 2000 has significantly underperformed S&P 500 since late last year. 

As you can see from the chart below, the ratio between Russell 2000 and S&P 500 is at 0.52 which is the lowest since August 2003. It’s not good to have breadth weaken. S&P 500 might outperform Russell 2000 even more in the rest of the year because the dollar is weakening. 

DXY closed at $96.09 which is the lowest level since March 20th. The low on the year is $95.22. Even with this recent decline, the index is still up 1.67% in the past year and down just 8 basis points year to date. 

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