The Great Rotation Is Underway

A seismic shift is rumbling through the financial markets in the second half of 2024. That’s right. Let’s break it all down…

As I’m sure you know, the Fed held interest rates steady at this week’s FOMC meeting. That was no surprise.

But after years of tightening, the Fed is finally expected to pivot toward rate cuts, quite possibly in September.

Friday’s disappointing jobs report only reinforces the view that the Fed will cut in September.

The U.S. economy created 114,000 non-farm payroll jobs in July, far below expectations. The consensus forecast was 175,000 jobs. The disappointing July number is a steep decline from June’s 179,000 jobs.

It’s no surprise then, as Investor’s Business Daily reports, investors are now pricing in a 100% chance of a Fed rate cut at the FOMC meeting in September. That’s up from just 64.1% from a month ago.

A True Game-Changer

We need to be clear about this. A rate cut wouldn’t be just another blip on the economic radar. It would be a game-changing development set to dominate market trends well into 2025.

After all, the Fed’s aggressive rate hikes have been the defining feature of the financial landscape for a number of years now. Now that’s about to change.

As this chapter draws to a close, a new one opens — and it’s filled with uncertainty, especially in an election year.

And while it’s entirely possible that the Fed lowers rates in September, that’s not a done deal, despite what the market anticipates. The market’s been predicting a “pivot” for a while now, and it hasn’t yet happened.

As my colleague Jim Rickards has noted, the Fed doesn’t want to be seen as political (even though it is). Cutting rates less than two months before the election would certainly seem to be political.

Jim thinks the Fed could still cut rates in November, after the election, and/or December. So the exact timing, pace, and magnitude of these cuts remain anyone’s guess. We’ll just have to wait and see how it all pans out.

But this ambiguity is precisely what’s going to drive volatility in the coming months.

Volatility Is Your Friend

Investors aren’t just sitting idle. They’re already trying to anticipate the Fed’s next move, creating ripples across the financial markets.

Take Treasury bonds as an example. Treasury yields, which move inversely to bond prices, are likely to become a rollercoaster ride.

One day, yields might plummet on expectations of aggressive rate cuts (they came down today). The next day, they could surge on strong economic data that suggests the Fed might hold steady.

This back-and-forth will create volatility that we haven’t seen in years.

But here’s the thing: Volatility isn’t inherently bad; it actually leads to opportunity.

It could actually trigger a massive stock rotation through the end of this year — and likely many years beyond that.

In other words, we’re staring the next major market opportunity right in the face. I’ve been closely watching for signs of this shift, and it looks like it’s here. The market is about to flip the script, and you need to be ready.

Here’s what you can expect…

The Interest Rate Domino Effect

Over the past year, we’ve seen the Magnificent Seven — mega-cap tech stocks like Nvidia, Amazon and Microsoft — dominate the market and the financial media.

But as the old saying goes, the bigger they are, the harder they fall. Here’s why. As the Fed signals a pivot towards rate cuts, it’s going to set off a chain reaction that could dramatically shift money flows in the market.

Once investors get this signal, it’s game on. They won’t wait for the September meeting before they start buying and selling accordingly. When interest rates start to decline, it typically benefits smaller, growth-oriented companies more than their larger counterparts.

That’s because these firms tend to rely more heavily on borrowing to fuel their expansion, so lower rates directly impact their bottom line.

Moreover, in a lower-rate environment, investors tend to have a greater appetite for risk, which naturally favors smaller, more volatile stocks. On the other hand, the mega-caps that have been the market darlings might start to lose their luster.

These companies have benefited from a flight to quality and their ability to weather higher rates. But as the tide turns, investors may start to view them as overvalued and overexposed.

Now, you might be thinking, “If I don’t own any of these mega-cap stocks directly, why should I care?”

Too Many Eggs in One Basket

Well, if you own any broad market index funds or ETFs, you’re more exposed to these large caps than you might realize. The S&P 500, for instance, is heavily weighted towards these top performers. Right now, the top 10 stocks in the index account for over 30% of its total market cap.

That’s an unprecedented level of concentration!

So, what happens when the market rotates away from these stocks? It could mean that the popular indexes many investors rely on for steady growth might underperform.

Meanwhile, smaller companies — the ones that have been overlooked and undervalued for years — could start to outshine their larger counterparts. This is where the opportunity lies for savvy investors.

During these pivotal rotations, we often see the market’s strongest stocks begin to retreat.

Meanwhile, other stocks and sectors that have been lying dormant start to wake up and take on new leadership roles.

If you can spot these rotations early and position yourself accordingly, you can ride these emerging trends to fresh highs (my colleague James Altucher is also on top of this trend. Go here to learn about the top five small-cap stocks that are set to lead the markets as this trend plays out).

We’re now seeing a powerful small-cap breakout that could take these stocks much higher.

And it’s entirely possible that these small stocks could be the next market leaders.

Now, this rotation shouldn’t be a cause for alarm. Instead, you should view it as an opportunity.

We’re entering a new chapter of the rate cut cycle.

Here’s my advice for you today: Think big by thinking small.