Until Tuesday's violent reversal, the S&P 500 Index (NYSE: SPY) had been steadily trending higher in August. At Tuesday's high, the S&P 500 was less than 0.5% away from a new, all-time high.
It was also the first down day of the month as the index finished 0.8% lower. Notably, sectors that have lagged for much of the rally like financials, small caps, airlines, and hotels are leading the market higher, while previous leaders like precious metals and technology stocks have endured selling pressure.
This is ultimately a healthy development for the market. Bull markets are defined by all parts of the market rising higher, with different sectors taking leadership.
Treasury Yields Tick Higher
The major reason for the change in the market's tenor is that there's increasing optimism that a vaccine is going to be developed by the end of the year. Additionally, economic data continues to show that the recovery continues.
The net result is that growth expectations have increased which translated into Treasury yields ticking higher. Higher growth means that precious metals become less attractive. It also makes cyclical stocks more attractive relative to technology stocks.
Surprisingly, the market hasn't reacted yet to Congress' failure to reach an agreement on extending the CARES act. Some believe that failure to do so would have devastating consequences in terms of small business failures and people unable to meet expenses.
Looking Forward
Typically, the first dip is bought following a relentless advance on strong market breadth. So, this reversal is unlikely to mark a top. Additionally, cyclical parts of the market like small caps, financials, airlines, and hotels finished green. This type of price action in these growth-sensitive stocks is also inconsistent with a market top.
Homebuilders have also been very strong. And, the sector is emerging from a seven-year period of range-bound trading that it looks to be decisively breaking higher from. If the housing market is accelerating that feeds into consumer confidence, household balance sheets, wage growth for blue-collar workers, and demand for other parts of the economy connected to housing like construction and materials. Its strength is a positive indication for the economy.
Some other reasons to expect that growth could surprise on the upside is that manufacturing has been trending lower since late-2018. Now, inventories are depleted, and new orders are rising. In areas of the world where the coronavirus is under control like Europe and Asia, the industrial economy was the first to bounce back. Manufacturing has been a negative contributor to GDP growth for the past couple of years.
If these early trends hold, it could be a positive force for global GDP which has positive consequences for employment, commodities, transportation, and other industries connected to manufacturing. Another supportive factor is the unprecedented amounts of fiscal stimulus which will lead to increased aggregate demand.