Investment Perspective
A well-built investment process addresses both halves of the investing equation: what to buy, and just as importantly, when and what to sell.
On the surface, July looked placid and unremarkable for the major stock market indices. The S&P 500 finished roughly flat, and the Dow Jones Industrial Average managed only a modest 0.4% gain. Yet these breakeven headline numbers masked one of the sharpest sector rotations of the year, a reminder that index-level calm can conceal considerable turbulence underneath.
After surging roughly 30% from the start of April through the end of June, the technology sector took it on the chin in July. The Technology Select Sector SPDR® ETF (ticker XLK) declined by 8% for the month as investors continue to grow increasingly wary and skeptical of the sheer massive scale of capital expenditure required to build out AI infrastructure. Semiconductor stocks in particular got pummeled. Having just posted their best quarterly performance since 1994, the Philadelphia Semiconductor Index reversed sharply, falling roughly 20% in July alone. Notably, earnings were not the culprit. Profits for semiconductor companies remained robust and continued to beat expectations. Instead, the abrupt shift in sentiment reflected a broader recalibration among investors: attention moved from AI demand, which remains strong, to AI monetization, as the market increasingly demanded evidence of real, tangible return on investment rather than continued faith in optimistic “futuristic” promises.
Money exiting technology stocks didn't leave the market, it just rotated. Investors redeployed capital into rate-sensitive sectors, small-caps and value-oriented equities. Energy was the standout performer of the month, with the Energy Select Sector SPDR® ETF (ticker XLE) gaining just over 12%, as oil prices climbed on supply concerns tied to the Iran situation and the Strait of Hormuz. Financials, real estate, health care and consumer staples also outperformed in July, benefiting from the same rotation out of high-multiple growth names and into steadier, more defensively-positioned businesses.
As for fixed income markets in July, it was virtually all headwinds and no tailwinds. Over the course of the month, the 10-year Treasury yield rose as new Fed Chair Kevin Warsh declined to rule out further rate hikes to combat inflation, pushing long-end yields higher and steepening the yield curve. Interest rates have been a slow-bleed for bonds all year, with yields grinding higher amid persistent fiscal deficit concerns, tariff-driven inflation pressures and the added uncertainty over new Fed chair Warsh's policy leanings. In short, bond holders felt sustained pressure throughout July even as equity markets, at least on the surface, muddled through relatively unscathed.
With all this rotation occurring within markets, it would be safe to assume volatility is broadly on the rise. Yet the chart below suggests that assumption is only half right.
Single-stock implied volatility versus index-level volatility; yellow highlights periods of divergence. Source: Bloomberg, Goldman Sachs Global Investment Research.
The chart shows two measures of volatility (risk). The lighter, sky-blue line is the implied volatility of the equity index as a whole; the darker blue line is the average implied volatility of the individual stocks within that index.
The gap between the two lines is driven by implied correlation, which is a measure of how closely those individual stocks are expected to move together. Correlation is the mechanism that converts single-stock volatility into index-level volatility. When correlation is high, stocks tend to move in lockstep, diversification benefits fade away, and index volatility rises toward the average of its parts. When correlation is low (as in the current environment), individual stock movements offset one another, and that diversification suppresses index volatility — even as single names remain priced for outsized moves.
That dynamic is what produces the divergences highlighted in yellow in the chart. Under normal conditions, the two lines track each other closely. However, there are times, such as presently, when single-stock implied volatility can rise faster than index-level volatility. This typically occurs when individual names are moving sharply but in offsetting directions: some stocks surging while others slide, netting out to a deceptively calm index. The end result is a market that looks serene and even dull on the surface while churning rapidly underneath.
This kind of disconnect between index-level and stock-level volatility has historically clustered around market peaks, as the chart's earlier yellow-highlighted periods in 2000 and 2007 illustrate. The index may appear to be consolidating or drifting sideways, but a great deal is happening beneath that surface. Again, this "hidden" volatility tends to show up at key turning points, when greed and fear collide and capital changes hands quickly as sentiment tugs in both directions at once.
It's worth noting that this pattern is a signal worth watching, not a forecast. A wide gap between stock-level and index-level volatility has preceded turning points historically, but it has also remained for extended stretches without one. We view it as one more data point supporting a process-driven approach, not as a reason to make dramatic changes on its own.
But it's precisely in moments like this — when no one can say with confidence what the near future holds — that having a disciplined investment process matters most. We would argue that long-term investment success has less to do with picking the right stock and more to do with having a disciplined, repeatable process grounded in empirical evidence for making decisions in the first place. Like tilling soil or turning compost, a sound process is built on discipline, routine, and continuous improvement grounded in real evidence, not gut instinct. Its central purpose is to remove as much emotion as possible from investment decisions, guarding against impulsive trades sparked by a "hot tip" overheard at a barbecue or read in an online forum. The goal is to avoid the emotional whiplash of decisions made on hunches or intuition alone.
One point too many investors overlook is that investing is inherently a two-part decision: when to buy, and when to sell. Undoubtedly, the bulk of the attention goes to the buy decision, while the sell decision is almost treated as an afterthought, as though it will simply take care of itself later, or as though the investment will keep appreciating indefinitely. In reality, once someone buys based on a tip or a hunch, the stock rarely behaves exactly as expected, and the investor is typically left without a plan for what comes next.
A well-built investment process addresses both halves of that equation: what to buy, and just as importantly, when and what to sell. Consider a stock mentioned by a well-known “expert” commentator on financial television. If you buy it, who will then tell you when to sell? And there's no guarantee that same commentator quietly exited the position weeks later, long before you hear about it.
To repeat for emphasis, a properly designed investment process should offer guidance and indications of what to buy and sell – it becomes an ongoing source of ideas, adapting to the current investment environment based on inputs that we believe to be predictive. In effect, the investment process is akin to the master control board in a plane. The control board receives various inputs from various sources (weather, atmosphere, air traffic controllers, etc.) and the pilot uses the control board to make decisions systematically rather than by instinct. In the same way, an evidence-based investment framework continuously adapts to changing market environments, methodically guiding what to accumulate, what to trim, what to exit completely, so that decisions are driven by established protocol rather than by “gut feel” or short-term sentiment.
To sum up, July's headline numbers may have told a story of calm, but the internals told a story of rotation, recalibration and rising stock-specific risk. Markets that look quiet on the surface are not always quiet underneath, and the periods that feel most uneventful are often exactly when discipline matters most. We remain focused on our investment process — not on chasing the last winner or the latest blaring headline.
As always, we appreciate the trust you place in our team at Measured Wealth. If your financial goals, retirement plans, or personal circumstances have changed, we encourage you to reach out so we can ensure your investment strategy remains aligned with your objectives.
Thank you for your continued confidence.
Historical data is not a guarantee that any of the events described will occur or that any strategy will be successful. Past performance is not indicative of future results.
Returns cited above are from various sources including Factset, Bloomberg, Russell Associates, S&P Dow Jones, MSCI Inc., The St. Louis Federal Reserve and Y-Charts, Inc. The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. Investing involves risks, including possible loss of principal. Please consider the investment objectives, risks, charges, and expenses of any security carefully before investing.
The indices and exchange-traded funds referenced above, including the Technology Select Sector SPDR® ETF (XLK), the Energy Select Sector SPDR® ETF (XLE) and the Philadelphia Semiconductor Index, and the related returns shown are presented solely for illustrative and informational purposes to demonstrate recent market trends. They are not intended to represent holdings in any Measured Wealth portfolio, nor do they represent investment recommendations or past or current performance of any Measured Wealth strategy. Measured Wealth may or may not hold any of the securities discussed.
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