Dear Monk,

The "big rotation" is here. Or so they say.

Out of 500 stocks in the S&P 500, 437 surged last month, but the index still declined by around 1%. Huh? How does that happen?

The "Magnificent 7" (Apple, Microsoft, Amazon, Tesla, Google, Meta, Nvidia) are not holding their weight. Their decline drags the index down despite widespread gains elsewhere.

But beneath the facade of the struggling index, the majority is still thriving. As investors pull money from top-heavy tech stocks, they’re redistributing it across a wider array of sectors.

In this newsletter, I'll break down what the "big rotation" is and how you can leverage it to your advantage.

Let's dive in!

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What's Going On?

The largest companies have outperformed the smaller ones for 3 years in a row, a rare feat as history shows us small companies tend to overperform:

But small-cap stocks surged 11% in July, while the S&P 500 remained flat:

Value stocks, undervalued and overlooked, gained traction while, growth stocks that had been soaring cooled off:

Why Is This Happening?

I see 3 mains reasons for this rotation:

AI and Innovation: The AI buzz is slowing, shifting the spotlight.

Interest Rates: Potential rate cuts are making investors rethink their strategies, favoring smaller companies.

Global Uncertainty: As seen this week, markets Market jitters escalate with the threat of recession casting a shadow.

Are We Due for a Recession?

No one can tell for sure. The only certainity we can have ist that recessions happen from time to time. Right now, 3 factors are pointing for a recession and contributed to this weeks market selloff:

Job data concerns: Jobless increased to 4.3%, triggering Sahm’s Rule. This rule states that if unemployment rises by 0.5% from its low in the past 12 months, a recession is likely. It's been accurate in the past, but no predictor is perfect as we have already seen with the Inverted Yield Curve.

Manufacturing data concerns: The ISM Manufacturing Index, which tracks factory activity, came in worse than expected. When manufacturing slows, it often precedes broader economic decline.

Treasury yield drop: The 10-year Treasury yield falling below 4% for the first time since February signals economic trouble. Historically, such drops suggest investors are nervous about future growth.

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How to Play It

Could we eventually face a recession in the US? Absolutely. The odds are significant over the long haul.

Yet, I’m genuinely not concerned. My approach in this—and virtually any market scenario—is to stay calm and stick to the fundamentals. High-quality businesses often emerge stronger from recessions.

So, my recommendation would be to take a deep breath and follow these 5 strategies to navigate these waters:

Stick with Winners: Don’t abandon tech giants. Their business is still thriving. Look for buying opportunities when they dip.

Dip into Small Caps: With small caps surging, add them to your mix. They’re catching up and could offer substantial upside.

Balance Growth and Value: Diversify by adding a blend of growth and value stocks.

Ignore the Noise, Focus on Conviction: Focus on firms with strong fundamentals and low debt. Great businesses typically thrive long-term, recession or not.

Watch the Leaders: Leading tech stocks often signal broader market trends. Keep them in view.

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The Bottom Line

This rotation and the potential recession ahead are an opportunity, not a catastrophe. Diversify, keep your purchasing schedule (I recommend investing at least once or twice a month no matter what the market does), and maintain your long-term conviction. Real monks buy and hold. Don’t panic; adjust only if fundamentals really change.

Hope this helps.

Happy investing!

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