Effects of Tight Monetary Policy have Started to Materialize. Will the Great Rotation Continue?

Amid easing inflation, underwhelming technology-related earnings, and increased probabilities of Fed interest rate cuts, equity markets witnessed a meaningful rotation in July in which smaller, value-oriented stocks outperformed large-cap growth. The Russell 2000, an index that tracks small-caps, gained over 10%, posting its best month since December, as well as its best July since 2022. US mid-caps (+5.9%) and US value (+4.7%) were also among the best performers. Bonds fared well as 7-10 year US Treasuries were up 2.9%, investment grade corporates rose 2.4%, and the US Aggregate Bond Index increased 2.3%. Aside from gold (+5.4%), commodities struggled as broad-based commodities were down 3.7%, crude oil decreased 2.3%, and silver fell 0.7%.