Markets Brief: Politics Make a Comeback

Insights into key market performance and economic trends from Dan Kemp, Morningstar’s global chief research and investment officer.

Expect Volatility This Week

In the wake of political violence flaring up again in the United States, investors facing uncertainty will likely seek narratives that predict the future and then change their portfolios accordingly. This can lead to volatility in asset prices, risking investors being whipsawed as prices overshoot in one direction and then another. So it is vital to remember an old investing axiom: “Don’t just do something; stand there.” The most important thing an investor can do is stick to their plan and avoid reacting.

Occasionally, these situations can create unusual opportunities for those prepared to take long-term, valuation-driven approaches to increase their returns—such as the fall in Japanese equities in the wake of the United Kingdom’s vote to leave the European Union. However, most investors are likely served best by doing as little as possible. The events over the weekend were not reflected in the market prices at the end of the trading week, which was dominated by news of falling inflation and stronger-than-expected profit growth from US companies reporting at the start of the earnings season.

Small-Cap Stocks Recover

Within US markets, the recent trend of large company leadership has reversed, with the Morningstar US Small Cap Index rising 4.62% over the week while the Morningstar US Mid Cap Index rose 3.05% and the Morningstar US Large Cap Index rose only 0.36%. Despite this, Morningstar’s equity analysts continue to see significant value within small and mid-size companies. You can read more of their perspective in our Q3 US stock market outlook.

Falling Inflation Raises Hopes for Rate Cuts

Optimism among investors was supported by lower-than-expected inflation data, with both the headline and core Consumer Price Index lower than expected. Headline prices fell by 0.1% in June. This naturally raised expectations of the Federal Reserve cutting interest rates, with the probability of at least two cuts happening by the end of the year rising to 92.9% from 76.4% a week earlier, according to CME FedWatch.

US Banks Start Earnings Season Well

The Morningstar US Banks Index rose 2.10%, and regional banks rose even faster, with a gain of 7.42% in the Morningstar US Regional Banks Index. Alongside optimism on interest rates, this reflects a strong start to earnings season for banks. You can keep up with the latest earnings reports and the expectations of Morningstar’s equity analysts here.

Expect a Noisy Week of Data and Earnings

While investors will likely focus on politics this week, numerous data releases will measure the economy’s health, alongside speeches by Jerome Powell and other Fed officials. Earnings season will move up a gear, with further releases from financial services firms and the healthcare sector. It will likely be a very noisy week for investors, reinforcing the importance of a long-term strategy.

For the Trading Week Ended July 12

• The Morningstar US Market Index rose 1.12%.
• The best-performing sectors were real estate, up 4.54%, and utilities, up 3.93%.
• The worst-performing sector was communication services, down 1.85%.
• Yields on 10-year US Treasury notes fell to 4.18% from 4.28%.
• West Texas Intermediate crude prices fell 1.06% to $82.28 per barrel.
• Of the 702 US-listed companies covered by Morningstar, 579, or 82%, were up, 3 were unchanged, and 120, or 17%, were down.

What Stocks Are Up?

Sunrun RUN, SunPower SPWR, Hawaiian Electric Industries HE, Uniti Group UNIT, SolarEdge Technologies SEDG.

What Stocks Are Down?

HubSpot HUBS, Wingstop WING, Chipotle Mexican Grill CMG, Meta Platforms META, Netflix NFLX.