Market Perspective for August 1, 2014

Stocks gave up the remainder of their monthly gains yesterday and finished the month with small losses, save the small cap Russell 2000 which fell 6.11 percent. For the broader indexes, the losses are a blip, but the decline in the Russell 2000 has investors nervous. It was the biggest one-month loss for the index since 2012. While short-term concern is warranted, in 2012 the Russell 2000 rebounded and went to new highs along with the rest of the stock market.

Commodities also took a hit this week, with oil prices slumping to $97 per barrel. This weighed on energy stocks, which had been the second best performing sector over the first half of the year. Utilities took a beating, with the S&P 500 utilities sector down nearly 7 percent in July. The sector is still holding onto decent gains for the year, but is now back to levels seen in late March.

The sell-off looks like a general pullback, with other leaders sliding as well. The Dow Jones Transports also dropped and over the past two weeks, has lost about 4 percent of its value, wiping out two months of gains.

Interestingly though, while the markets have been pulled back, it isn’t the defensive sectors that are now the new market leaders. We already mentioned utilities, but both healthcare and consumer staples slumped, as each has underperformed the S&P 500 Index. Instead, it was technology, consumer discretionary and retail that were among the leading sectors on a relative basis.

The strength in these sectors indicates investors aren’t overly concerned. In fact, combined with the weakness in consumer staples and utilities, this may be a sign that investors are positioning for higher interest rates following the strong GDP report.

In sum, stocks got hit with a mild sell-off this week, but relative sector performance suggests investors aren’t turning bearish. They’re holding shares such as technology and easing up on shares of defensive sectors in case rates move higher.

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