Indiana Trust Wealth Management
Investment Advisory Services
by Clayton T. Bill, CFA
Vice President, Director of Investment Advisory Services

  • The U.S. equity market, represented by the S&P 500 index, slipped 0.8% for the week.
  • The rotation from mega-cap tech stocks to small-caps and value-oriented stocks continued this week. This recent trend has not pushed volatility for the overall market to historically unusual levels. 

On Wednesday, the S&P 500 dropped by 2.3%. Bloomberg news noted that day’s decline snapped a 356-trading day streak without a drop of over 2%, the longest the market has gone without such a daily dip in more than 17 years.

Perusing social media or financial news sites, one may conclude that stock market volatility is on the rise. However, a glance at a chart of market volatility as measured by annualized standard deviation of returns shows that the recent choppiness in markets barely registers. Volatility by this gauge is at normal levels:


Source: Bloomberg, July 25, 2024

The most-cited catalysts for the selloff on Wednesday were earnings releases from big tech, including Alphabet, the parent company of Google, and Tesla. The Wall Street Journal noted that the thrashing of tech stocks this week reflects a growing skepticism of the profit-driving potential of AI and robotaxi deployment.

This interpretation could be true. Or, as Bloomberg's Tracy Alloway noted, it could be due to a few big hedge funds trying to even out their factor exposure. Most big multi-strategy “pod shop” hedge funds try to stay factor-neutral to even out their risks. As the growth-factor (big tech) has sold off recently, small-cap stocks and the value-factor (which are related) have staged a dramatic rally.

Ms. Alloway summarizes the situation: “The big question right now is the degree to which all these proliferating attempts” by big hedge funds “to be factor-neutral might be exacerbating short-term market moves themselves.”

There is always a desire to have a tidy explanation for short-term market gyrations, but the complexity of capital markets does not often allow for easy interpretations. Recent market action could represent a change in expectations for AI. Or, it could be a few big hedge funds out there, trying to solve their problems. Perhaps it is all the above.

Editor’s note: Our weekly update will be on hiatus until mid-August.

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