Narrative Versus Reality | The Investors Edge
By John Stewart, chief investment officer at Farmers Trust Co.
Week in Review: Inflation Report Sparks Rotation in Stocks
This past week’s CPI inflation reading was a welcome sign. Prices actually fell 0.1% in the past month, which was better than the 0.1% increase that was expected. That brings the inflation rate down to 3.0% over the past year. Still higher than the Fed’s 2% target, but better than the 9% inflation of 2022.
With this continued progress on inflation, a quarter-point cut in the Fed’s interest rate target is now all but assured to happen at their September meeting.
Investors took this inflection as a reason to sell all their winners and rotate money into the underperforming and interest rate sensitive parts of the market.
Large Cap Growth, primarily all the big technology stocks you know and love, sold off more than 2% in the wake of the report, while Value stocks, small caps, and utilities all traded higher.
We’ve seen these types of rotations out of the momentum stocks several times this year, and each time was relatively short-lived, as every pullback in mega-cap growth has been a buying opportunity. With valuations rising however, at some point, the market winds could change direction.
Featured Insight: Narrative Versus Reality
Narratives are important in society. Once a prevailing narrative becomes well accepted, most people will believe it regardless of its merits or even whether it is based on truth or facts.
You’ve heard of memes, right? That word comes from memetics, which is a theory of the evolution of culture based on Darwinian principles with the meme as the unit of culture.
Long story short – people are copycats.
Nowhere is this behavior more prevalent than in markets – prevailing narratives drive investor behaviors, and people’s copycatting nature creates a self-reinforcing process that strengthens the narrative.
Problems arise when a prevailing narrative doesn’t jive with reality – when it is ultimately discovered that the emperor has no clothes, the narrative falls apart – and so does the stock (or stocks) that were trading based on that narrative.
Looking Ahead: Earnings Season Kicks Off
With the second quarter of 2024 now in the books, it’s time for another earnings season. Corporations are now beginning to report their results for last quarter, and the number of companies set to release earnings will grow in the coming weeks.
As always, expectations for next quarter’s earnings will be more important than what happened in the past, and third quarter estimates for the early reporters have fallen by a little more than 2% versus a drop of less than 1% at the same time last quarter.
In addition, more than half of the early reporters have missed their sales estimates.
With only a few companies reporting so far, it’s certainly too early to tell if this trend will continue, but if it does, the market narrative may need to change.
Copyright 2024 The Business Journal, Youngstown, Ohio.
