Stocks Winning Streak At Risk Of Ending

Key Takeaways

• Nasdaq 100 On Pace For Best First Half Since 1999
• Russell Reconstitution
• Market Volatility Remains Subdued

Following a rally on Thursday, markets are trading lower in premarket and could be at risk of snapping their multi-week win streak. On Thursday, the S&P 500 closed higher by 0.4% while the Nasdaq Composite was up 1%. As we head into the last week of June, it’ll be interesting to see if the tech sector can close out the first half of the year and hold its impressive gains.

Year to date, the Nasdaq 100 is up an impressive 38%. That far outpaces the 14% gain in the S&P 500. In fact, the Nasdaq 100 is on pace for its best first half since 1999. Stocks such as Amazon
AMZN
, Apple
AAPL
, Microsoft
MSFT
, Netflix
NFLX
, Nvidia and Tesla
TSLA
have all skyrocketed so far this year, largely in defiance of rising interest rates. Meantime, small cap stocks, while up on the year, have fallen well behind with the Russell 2000 up just 5%. However, today could prove interesting for the Russell.

Today is the conclusion of what is known as the annual reconstitution of the Russell. Each year, the Russell 1000, 2000 and 3000 rebalance themselves in order to remain representative of market segments. Reconstitution generally results in more volume and the potential for a little more action within the Russell index products. This is something worth watching, especially given the way in which the Russell has lagged other indices.

Yesterday, Jerome Powell wrapped up his two days of congressional testimony. In his remarks, Powell reaffirmed the likelihood of further raising interest rates, suggesting two more rate hikes this year remain likely. Currently, the market is assigning a better than 75% chance the Fed will raise interest rates by a quarter point at their next meeting.

In the meantime, the Bank of England raised interest rates on Thursday. Most observers were surprised by the half point increase after expecting just a quarter point bump. Following that news, the ECB announced they too would remain aggressive with respect to interest rates. Both the ECB and our own Federal Reserve Open Market Committee (FOMC) have meetings scheduled for the end of July.

One area of the economy I’ve mentioned and continue to monitor is housing. Consumer spending is often driven by the housing market. If housing prices are increasing, people tend to be more willing to spend money. Because of that, I believe it will be difficult to get inflation to fall unless we also see a drop in housing prices. We may have seen the first signs of that yesterday when it was reported median prices for existing home sales fell a little over 3%, year-over-year. The rapid rise in mortgage rates may be a contributing factor to this. Currently, the average rate for a 30 year mortgage is 6.67%, that’s up nearly a full percentage point from a year ago.

Finally, I want to mention market volatility, or as the case may be, a lack thereof. Yesterday, the VIX closed below 13. We haven’t seen volatility this low since the beginning of 2020. Barring an unforeseen event, it’s hard to see what would cause volatility to increase between now and the 4^th of July holiday. However, I’d also caution that it’s when things are very quiet and markets seem to have little to say that something relatively minor can have an outsized impact. Therefore, as always, I would stick with your investment plan and long term objectives.

tastytrade, Inc. commentary for educational purposes only. This content is not, nor is intended to be, trading or investment advice or a recommendation that any investment product or strategy is suitable for any person.