Weekly comment: Small caps shine as tech pulls back

3 minute read

Weekly podcast – Market overview

This week’s host, Investment Manager, Oswald Oduntan discusses the ups and downs of the past week with Head of Fixed Interest Research, Richard Carter, and Technology Research Analyst, Ben Barringer. Among the topics discussed – a week of divergence amongst global stocks, US tech large caps giving up territory to cyclical and small cap sectors, latest UK economic indicators leading to an increase in the pound, and much more.

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Market overview – Richard Carter, Head of Fixed Interest Research

Small caps shine as tech pulls back

Last week’s trade was marked by a rotation in financial markets as small cap and value stocks outperformed while rising US-China tensions weighed on overall sentiment. The MSCI All Country World Index declined 2.1% but remains 12.9% higher YTD.

US small cap benchmarks enjoyed a strong run early on in the week and still ended up 1.7% despite some selling into the weekend. These benchmarks have lagged their larger-cap peers so far in 2024 but last week’s rise was in contrast to tech indices which retreated 3.6%.

Smaller firms are often seen as a purer play on the US economy, and a series of data points released last week surprised to the upside. June core retail sales jumped the most since January 2023, rising 0.8%. Building permits also rose for the first time in three months and industrial production came in at 0.6%, nearly double the consensus forecast. Value stocks seemingly have been boosted by polls showing an increasing likelihood of a Republican victory in November’s elections, with the financial sector seen as a beneficiary of potentially lighter banking regulation.

UK large caps held up a little better than their international counterparts, falling 1.2% compared to a 3.1% drop for the MSCI Europe ex UK. The pound ended the week at 1.29 against the US dollar, down from 1.30. The 10-year gilt yield gained 1 basis point on the week to end at 4.12%.

Biden steps aside

Over the weekend Joe Biden announced that he would drop out of the US presidential race, abandoning his re-election bid and endorsing vice-president Kamala Harris. Recent weeks have been dominated by rumours regarding his candidacy after a dismal debate performance raised concerns on Biden’s presidential suitability. A significant polling lead has opened up in favour of Donald Trump and betting markets are giving Trump around a 65% chance of prevailing later this year.

Some of the Democrats’ biggest donors have backed Kamala Harris and the vice-president is a strong favourite to secure the party’s nomination. The Democratic National Convention in August will decide the party’s candidate. Biden’s decision to step aside has not seen a significant move in the odds of a victory for the Democrats later this year and there has not been a sizable market reaction.