The great Rotation of July being upended in August

 

It is truly surprising how fast expectations and themes can change in equity markets. July was being called the Great Rotations from growth and momentum into smaller caps and value based on the view that inflation was solved, and rates would come down likely in September. The inflation problem was being licked and US economic growth was still considered reasonable. The result was interest sensitive sectors like real estate and utilities did well. Small caps did well. Value was doing better than those growth and momentum driven stocks. 

The story has now changed over the course of two days since the Fed meeting. Initial jobless claims have moved higher. The Sahm Rule may have been hit. The employment number moved lower relative to expectations. The unemployment rate moved higher, and the talk has been about Fed making a policy mistake and a 50 bps cut is on the table. 

All the facts are true; however, there is a sense of market over-reaction. The Mag Seven may come down to more reasonable levels and there should be a careful review of small cap names. The equal-weighted over market-cap trade looks more attractive at this time. Macro models will tilt to lower exposure to stocks and more to bonds, but it may be early to suggest that this is the beginning of major correction. Unfortunately, a correct is biased by the mega cap names and not the average name.