Relative Weight Spotlight – Monthly Outlook – July 2019

By Direxion

OVERVIEW

• Market Drivers: With expectations for a cut in the federal funds rate all but certain and positive sentiment around U.S. – China trade relations, June saw U.S. equity markets mark another all-time high. Economic data around the globe is undeniably trending lower, but we’re seeing signs of stabilization. Fed policy, trade relations, and “lower but stable” data seems to be setting the stage for another “Goldilocks” period.

• Performance: June provided signs of improving market breadth amidst a month that carried some “risk-on” sentiment. While overall relative value themes are largely intact, Small Caps outperformed Large Caps, Value names outperformed Growth stocks, and Emerging Markets showed signs of life relative to their Developed Market counterparts. Notably, short-term price momentum signaled shifts in relative strength towards Value and Emerging Markets.

• Flows & Positioning: Flows throughout June supported longer-term trends with market positioning, as we saw the largest relative strength in 1-month flows lean towards Large Cap exposures (relative to Small Caps) and U.S. stocks (relative to International names). We saw net positive flows across equities in all ten categories with the exception of Emerging Markets.

• What’s Next: All eyes on the July Federal Reserve meeting, and the market is fully expecting a 0.25% rate cut. While the G-20 meeting between Trump and Xi Jinping was a net positive, uncertainty remains regarding the next steps towards a resolution. In the meantime, further tariffs have been proposed on the EU. We’re keeping an eye on volatility, but remain skeptical that the VIX can return to the 10-11 range on just rhetoric alone.