While preparing to write this post, it became clear that one word would encapsulate today’s topic: perspective.
Even with the recent volatility, the S&P 500 is up approximately 10% so far this year. That’s impressive in any year, but particularly this year considering the index just had two consecutive years with gains of 20% or more.
Recently it’s become clear to us at Cornerstone that 2025 will be characterized by three distinct phases.
- January to April = tariff fears
We don't want to rehash the tariff war, but the fact that high yield spreads did not widen dramatically provided effective data for us to believe the risk of recession was low. That’s been the case thus far. - April through July = the most-hated V-shaped rally of all time
- August and beyond = a more doveish Federal Reserve and manufacturing recovery
While we don't know how phase three will play out yet, we think the final three to four months of 2025 will provide relief for markets. That’s because we think the Fed will finally begin to cut rates while at the same time the ISM Manufacturing index recovers and rises above 50 after spending 28 months below 50:
If true, it would be positive for stocks and support the S&P 500 reaching somewhere between 6,600 and 7,000 by year end. Keep in mind, it won’t be a straight path, especially as technical indicators point to continuing short term seasonal volatility.
Even if that happens, a floor will most likely appear quickly as we transition into a rate-cutting period, which has become even more probable given the central bank's recent decision to leave rates unchanged and Chairman Powell’s doveish commentary at Jackson Hold last week. Interestingly, two top Fed officials dissented:
That hasn’t happened in over 30 years.
August’s Market Rotation
Turning from our base outlook to the current situation, we want to visualize and analyze August’s market rotation. There's been a big change in equity behavior as growth stocks have come under some pressure.
While some folks might be nervous, this action is typical of summer’s low liquidity and seasonal weakness. We've seen this pattern repeatedly.
Yes, some further bumpiness over the weeks ahead could happen. But the good news is that this is expected and needed because markets must cool after monster rallies. Remember, history shows markets move in cycles, oscillating from one extreme to another.
After April's capitulation and forced selling, there was a rocket rally for the ages. But the underlying data has shifted.
The all-important Big Money Index (BMI), which is MoneyFlows’ proprietary 25-day moving average of “big money” investor activity, fell from overbought territory:
This provided an early warning sign that volatility was ahead. It’s come to fruition, especially over the past week.
We prepared readers for this situation a month ago when saying returns after the BMI leaves overbought territory are suboptimal, to say the least:
We can learn from history here too – not all pullbacks are the same.
For instance, sometimes stocks decline in lockstep together (i.e., a correlation of 1). During other pullbacks, you could see an underlying market rotation where money rotates from leading sectors to lagging sectors.
The second situation is what we find ourselves in today. And it’s healthy over the long term.
On-fire areas like semiconductors and the technology sector have taken a hit over the last couple of weeks, while underperforming groups like the equal-weight S&P 500 and Russell 1000 Value Index have begun to show life. “Big money” is not looking at valuation in a vacuum.
For perspective, since the market peaked around Aug. 14, many major indices that include big tech stocks have fallen while areas with more modest valuations have risen.
Getting closer to home, we have two flagship equity strategies at Cornerstone:
- Large-Cap Dividend Growth (less volatile, more defensive)
- U.S. Large-Cap Strategic Growth (more volatile, tech heavy, more aggressive)
Here is the year-to-date performance through July 31:
To highlight August’s volatility, here is the year-to-date performance through Aug. 20:
Drilling down, when an index like the equal-weight S&P 500 is flat and the Cornerstone Dividend Growth Strategy is up in August, there’s clearly been a rotation.
Sector-wise since the start of August, growth areas have fallen as laggards rose:
Growth sectors like tech and industrials have fallen, while unloved areas such as health care, materials, and staples have benefited. While the above chart provides a decent overview, it doesn't completely grasp the underlying individual pullback pain in growth areas of the market.
For example, over the past week some of our best performers hit a wall.
Palantir# (PLTR) was down 13.61% after a 107.6% YTD rise:
NVIDIA# (NVDA) fell 3.42% over the past five days, but it’s up 26.4% YTD:
Lastly, Oracle# (ORCL) dropped 5.12% in the past five days alone but remains up 41% YTD:
Despite the small dips, these stocks remain cornerstones of our strategic growth model.
Light Volumes and Increased Volatility
To wrap up, our analysis has shown this clear market shift for almost a month. Within the tech sector, there was nothing but inflows until August:
While some will blame whatever they can to support their emotional fears, we find it's fascinating how once again this current rotation under the surface rhymes with history. Traders are on vacation, and volumes are extremely light. That opens the door for increased volatility.
Light volumes and increased volatility usher in more seasonal weakness:
So the rotation is in full swing, right on time.
As others focus on the current headlines, we will begin to prepare and focus our time on the future. After all, at some point the tide will turn and growth equity inflows will roar back.
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*Past performance does not guarantee future results.
*Investing involves risk and you may incur a profit or loss regardless of strategy selected.
* The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
# PLTR, NVDA, and ORCL are owned in Cornerstone client portfolios and by Daniel Milan personally.
Securities sold through CoreCap Investments, LLC. Advisory services offered by CoreCap Advisors, LLC. Cornerstone Financial and CoreCap are separate and unaffiliated entities.