Last week, due to investors' concerns that the Fed's slow interest rate cuts missed the opportunity to "rescue" the US economy, it triggered a fierce sell-off in the US stock market, leaving investors guessing what the future holds.
The Federal Reserve announced last week that it would remain inactive, but Federal Reserve Chairman Powell hinted that it may cut interest rates as early as the September meeting. The non farm payroll data released afterwards unexpectedly fell far short of expectations, shocking Wall Street and making investors increasingly pessimistic about the US economy.
This led to a significant drop in the tech dominated Nasdaq 100 index, and the S&P 500 index also fell 3.2% in two days, marking the largest two-day cumulative decline since March this year.
Technology stocks and non essential consumer goods stocks have been hit the hardest, but not every industry has paid the price. For example, utilities and real estate companies were the best performing sectors in last week's S&P 500 index. These companies distribute high dividends and are welcomed by investors when bond yields fall.
Against the backdrop of a cooling job market, interest rates are likely to decline, and this round of trading is still ongoing. But which stocks would you buy? "Said Eric Diton, President and Managing Director of Wealth Alliance." Investing in dividend paying companies is important because small companies holding more debt are not a guaranteed bet
Investors seem to have also noticed this. Data shows that last week, investors invested nearly $1 billion in exchange traded funds (ETFs) in the US real estate and utilities sector, while only $300 million was invested in technology ETFs.
Analysis suggests that this is the second stock market rotation that investors have experienced in recent times.
The first time was at the end of June, when demand for small cap stocks began to rise. At that time, the expected price to earnings ratio of the Russell 2000 Index was 23 times, almost on par with the 21.2 times of the S&P 500 Index. Traditionally, such a small valuation gap is a signal to buy small cap stocks, and investors are sure to sell large tech stocks and instead buy high-risk small cap stocks.
This situation lasted for several weeks until the valuation gap between the two widened and large cap stocks retreated to their typically attractive valuation levels. At this point, the first round of trading has ended.
Now, as the interest rate cut cycle seems to be coming, the yield of treasury bond bonds has fallen sharply, and investors are flocking to stocks with low volatility that pay dividends from utilities to real estate investment trusts. The yield of 10-year and two-year US treasury bond both fell below 4% last week, of which the yield of two-year treasury bond fell to the lowest level since May 2023 last Friday.
This means that with the arrival of the traditionally worst two months of return for the US stock market - August and September, the US stock market may suffer even more than dividend driven stocks.