Markets closed higher last week, with the S&P 500 advancing 1.5% and the Nasdaq Composite gaining 3%. Volatility has remained low, with the VIX near a 5-year low of 12.66. This low volatility has been a positive sign for bulls, but some investors may feel nervous as quiet markets can be a cause for concern. One potential worry is the concentration risk in equities, with the ten biggest stocks in the S&P 500 now accounting for 37% of the index’s total value. This growing concentration could pose risks for investors, especially in a period of low volatility.
The upcoming week is expected to be busy in terms of economic data, with members of the Fed speaking three out of five days. Key reports include Retail Sales and the Purchasing Managers Index (PMI). Last week’s Producer Price Index and Consumer Price Index came in weaker than forecast, sparking hopes for an interest rate cut in September. However, the Consumer Sentiment report that came in significantly weaker than expected may warrant further discussion. Additionally, a “quadruple witching” expiration could make for an interesting week in the markets.
Consumers’ perceptions play a crucial role in the economy, as falling perceptions often lead to decreased spending. Therefore, the Retail Sales report is of particular interest in determining consumer sentiment. Analysts are expecting strong second-quarter earnings growth of 9%, but the market is currently trading at a higher valuation of 21x its 12-month forward earnings, compared to the 10-year average of 18.1. Any surprise weakness in earnings could result in a pullback in equities closer to historical valuation levels. The Consumer Sentiment report may provide valuable insights into consumer concerns that could impact the forthcoming earnings season.
In the market, copper prices are down nearly 2%, affecting shares of Freeport McMoran. On the other hand, chip stocks like Broadcom and Micron are showing strength, with Broadcom up nearly 3.5% following a stock split announcement. The chip sector’s optimism is translating into gains for related companies. As the week begins with a mid-week holiday, lower volume levels are expected, but there is potential for surprise movements when markets are less closely watched. It’s important for investors to stick to their long-term plans and objectives amid market fluctuations and uncertainty.
Overall, the market is in a period of low volatility and high concentration risk, with key economic data releases and market movements shaping investor sentiment. Consumer perceptions and upcoming earnings reports will play a crucial role in determining the direction of the market. As investors navigate through these uncertainties and potential risks, sticking to long-term investment strategies and objectives is key to weathering market fluctuations.
