Two notable features of the 2024 market rally were the power of momentum and the dominance of large-cap stocks. The market peaked on July 16, but momentum and size peaked a week earlier, on July 9. The market now looks like it bottomed on August 5. That’s about a week after momentum and size bottomed on July 30.

The public was introduced to Open AI's ChatGPT on November 30, 2022. It took a month for the potential of this breakthrough to electrify the performance of tech stocks. The tech sector in the S&P500, measured by the XLK ETF, dropped in December. But XLK took off at the beginning of January and returned 55% in 2023.

The S&P500 has returned 15% through June 20, 2024. Half of the gains were achieved since early May. Momentum also has a strong 2024, but its excess return this year was achieved before early March. Since then, the power of momentum has spread throughout the market. The chart illustrates the momentum story.

It took eight weeks after the 9/11 attack on the US for the S&P500 to sustain its recovery to its pre-9/11 level. The rebound from its 9/21 low was substantial, returning 21% by mid-March. However, seven months after 9/11, the S&P500 dropped below the pre-9/11 level until the end of 2003. How does that compare to Israel's stock market experience since the October 7 attack?

In previous articles, I've highlighted the strong correlation between the direction of bond yields and the return to Free Cash Flow yield (FCF yield - Free Cash Flow per share divided by current share price). This correlation is because value stocks, with their shorter-duration cash flows, are more resilient to increasing rates than growth stocks with longer-duration cash flows. This post is an update about what stocks appear to be pricing for the direction of interest rates.

The markets are frustrated, waiting for a decline in interest rates. There is now the added concern of rates going higher. In a recent note, I showed that when credit risk is tight, as it is now, FCF yield (Free Cash Flow per share divided by current share price) moves in tandem with the direction of interest rates. The reason is that the cash flow duration is shorter for value companies than for growth companies. Hence, increasing rates benefit value, and declining rates hurt. The FCF yield factor for value stocks that I use is a long-short portfolio of stocks from the top 500 market cap US stocks, long the top FCF yield stocks, and short the lowest in each sector (i.e., sector neutral). It is produced and rebalanced weekly using Finsera platform.