Image Source: Unsplash

MARKETS

The U.S. stock market took investors on a joyride Tuesday, with major indexes reaching for the stars, while small-cap stocks continued to outshine their larger tech cousins.

The S&P 500 sprang up 0.6%, notching its 38th record close this year. The Dow Jones Industrial Average stole the show, jumping 743 points, or 1.8%, clinching its own all-time high. That's the kind of percentage gain the Dow hasn't seen since the last time everyone forgot what 'YOLO' meant. Meanwhile, the Nasdaq Composite tagged along with a modest 0.2% gain, proving even tech stocks can still hold up in the rotation.

The Dow's meteoric rise was powered by a stellar performance from UnitedHealth (UNH), whose robust earnings report had investors feeling healthier than a gym buff after a kale smoothie. Financial heavyweights like Bank of America (BAC), Charles Schwab (SCHW), and Morgan Stanley (MS) also joined the party, reporting gains in investment-banking revenue that made the bulls on Wall Street prance around like they just discovered a free lunch buffet.

The ongoing trend of ditching megacap tech for small-cap stocks continued, with the Russell 2000 outshining the Nasdaq Composite like it's 2000 all over again. As interest rates potentially get sliced and diced by the Fed, small-cap companies might be popping more champagne corks than their big brothers who locked in low rates back when face masks were the rage during Covid days. It's like watching a high-stakes game of musical chairs where the prize is more zeros in your portfolio and fewer existential crises.

While tech stocks have been the golden geese of index investors, diversifying the rally is like adding sprinkles to your ice cream — it just makes everything better. It's a hedge against putting all our eggs in the tech basket and hoping they don't hatch into a bear market. Investors seem confident that the Fed's on track to potentially cut rates in September as inflation cools, with odds skyrocketing faster than a TikTok trend.

Over in the bond market, the 10-year Treasury yield took yet another favourable turn dropping to 4.168% from Trump “steepeners “at 4.231% the day before. Bond traders and stock market operators are enjoying the current rate cut fiesta and proving that even in finance, political drama sells.

In economic news, American shoppers showed their resilience in June, with retail sales holding steady despite predictions of a summer slump. Turns out, consumers are still swiping those credit cards, perhaps lured by those "50% off everything" signs that are as irresistible as a puppy in a pet store.

And speaking of drama, the 2024 election race took a plot twist when Donald Trump dodged an assassination attempt. PredictIt data shows bets on a Trump victory heating up, as investors speculate on tax cuts that could spark more economic celebratory fireworks than a Fourth of July barbecue.

In summary, the market's dancing to a new tune, but remember: you don’t want to be the last one on the dance floor when the music stops.

Investors diving headfirst into small-caps and cyclicals during rate cuts might need a reminder: these cuts often happen when the economy takes a breather. With inflation taking a nap, companies might find it harder to raise prices—like trying to charge extra for guac when everyone's suddenly into homemade salsa. And that's no fiesta for lower-quality stocks trying to flex their pricing muscles.

But for today, with reports of the American consumer's demise greatly exaggerated and the Fed on the brink of a spectacularly stock market-friendly rate cut bonanza, all ships rose.

ECONOMIC NUTS AND BOLTS

Hold onto your shopping carts, folks! Despite fears of a weakening U.S. consumer, June retail sales pleasantly surprised everyone. While overall sales dipped a negligible 0.02% last month (blame it on a car sales glitch and cheaper gas), May's numbers got a makeover from 0.1% to a sprightly 0.3% increase. Take that, pessimistic forecasters who predicted a 0.3% decline!

The real winners? Retail categories are not named "cars" or "gas." Sales excluding autos and fuel shot up a robust 0.8%, and the control group for retail sales, a GDP favorite, strutted its stuff with a 0.9% uptick.

But wait, there's more drama: a cyber attack threw a wrench in auto sales, making us wonder if car dealers were tallying sales a month behind. Meanwhile, plunging gas prices made filling up less painful, but also caused a hefty 0.6% dent in overall retail sales.

Sporting goods took a tiny tumble (0.1%), but other categories boogied on. Furniture (+0.6%), building materials (+1.4%), and electronics (+0.4%) saw gains, despite high interest rates and housing market woes. Even food and beverage sales held steady (up 0.1%), proving that Americans will never say no to a good meal out.

In short: June's retail report paints a picture of a resilient American shopper who splurged on everything except cars and gas. With strong gains in real sales and May's upward revision, it looks like Q2's consumer spending and GDP forecasts might just need an upgrade. As for the Fed hawks eyeing rate cuts, this still means September with everyone hoping inflation plays nice.

More By This Author:

The Trump Trade Underpins The Greenback
Markets Take US Politics In Stride
Forex Markets Navigate Political Drama And Economic Updates