By John Stewart, chief investment officer at Farmers Trust Co.

Week in Review: Smaller Companies Join the Party

It’s been a tug of war between the biggest of the big, sometimes referred to as the Magnificent 7, or the largest seven companies that make up a big chunk of market indexes like the S&P 500 index, and, well, the rest of the market.

After outperforming for the past couple of years, the largest companies took a breather in the first few months of the year before reasserting their dominance from mid-April through last week.

This past week, however, smaller companies took the reins as the Russell 2000 Index made its first new highs of the year since January, up roughly 5% versus the S&P 500’s gain of roughly 1%.

So is this another inflection point, or just some portfolio rebalancing taking place after a big run in large growth stocks?

It’s tough to say, but the market rotation looks healthy from the perspective of this bull market continuing for at least a while longer – it’s a good lesson, however, in why you should stay diversified and resist the urge to put too many eggs in any one basket.

I’ve talked about the Federal Reserve, monetary policy and interest rates a lot on Investors Edge, but it’s important to reiterate some key concepts, especially for new viewers.

When you hear talk of the Fed cutting interest rates, what they are talking about is the Fed Funds rate, which is the rate that banks lend to each other in the overnight market – it’s the shortest of short-term interest rates.

While all interest rates are somewhat interconnected, this does not mean that all interest rates will go down when the Fed cuts the Fed Funds rate.

In fact, the last time the Fed cut rates, longer-term interest rates, including mortgage rates, actually went higher.  It’s certainly possible this could happen again if the market expects the Fed cutting rates could push inflation expectations higher.

The rate most people are familiar with that will be very closely impacted by rate cuts is the money market interest rate – expect the rate you earn on your money market savings account to move lower between now and the end of the year by roughly the same amount that the Fed cuts.

Looking Ahead: Lots of Data on Housing

The housing market has been a conundrum for a while now – prices are too high because there’s not enough supply, exacerbated by too-high interest rates so no one with a low mortgage rate wants to move, and so on and so on.

Housing has been a market where it doesn’t seem like anyone’s happy; it doesn’t matter if you’re a buyer, a seller, or a builder – everyone seems to be frustrated.

We’ll get a lot more insight into what’s going on in housing next week with some type of housing data almost every day.

We get the homebuilder confidence index on Monday, housing starts and building permits on Tuesday, and existing home sales numbers on Thursday.

Who knows, maybe there will be some signs that housing is turning the corner.