Q2 2024 MARKET COMMENTARY
MARKET RECAP
In the second quarter of 2024, the U.S. economy remained resilient in an environment where inflation and interest rates remained higher than expectations. Tighter monetary policy was offset by accommodative fiscal policy and a strong US consumer.
The S&P 500 Index gained nearly 4.5% in the quarter, reaching a new all-time high. Gains were again led by technology stocks with the Nasdaq gaining over 8.0% in the quarter. Chip-maker Nvidia became the world’s most valuable company in late June after its share price climbed to an all-time high. We also saw the continuing trend of large-cap stocks (Russell 1000 Index) outperforming small-cap stocks (Russell 2000 Index) and growth (Russell 1000 Growth) beating value (Russell 1000 Value).
Overseas, results were mixed with developed international stocks (MSCI EAFE) falling 0.2%, while emerging markets stocks (MSCI EM Index) rebounded nearly 5.0%.
Within the bond markets, returns were positive across most fixed-income segments. The benchmark 10-year Treasury yield ended the quarter unchanged, but interest rates were volatile. The 10-Year Treasury yield started at 4.20% and rose to 4.70% before returning to the mid-4.20% range. The Bloomberg U.S. Aggregate Bond Index gained 0.3%.
As the narrative around peak rates was reinforced throughout the month, growth stocks added to their enormous year-to-date lead over value stocks. The Russell 1000 Value Index posted a more than respectable gain of 7.5% but was not a match for its growth counterparts’ return of 10.9%. So far this year, large cap growth stocks are outperforming large cap value stocks by a colossal 31 percentage points! 2023 has been the second-best year for growth stocks relative to value stocks since the first full calendar year of the Russell 1000 style indexes in 1979.
INVESTMENT OUTLOOK & PORTFOLIO POSITIONING
During the second quarter, the U.S. economy began its fifth year of expansion after the brief pandemic-related recession in April 2020. Ongoing economic growth has defied widespread expectations of a recession that were present for most of 2023 and into the beginning of 2024.
Recent data suggests that higher interest rates and inflation have started to impact the US consumer. The University of Michigan Consumer Sentiment Index fell to a seven-month low in June. In the May retail sales report, growth was positive but slower than expected. This recent data point suggests consumers are exercising more caution amid tighter budgets. Headline sales rose 0.1% from the prior month versus the consensus for a 0.3% rise.
At this point, we would describe the slowdown in consumer spending as a normalization after a period of splurging, rather than something more ominous. So far, concerns around the consumer have not seemed to scare investors as the S&P 500 has made 30 new highs and the economy has grown at nearly 3% (after inflation) over the past four quarters. Our base case is for the economy to continue growing, albeit at a slower pace, for inflation to grind lower, and the backdrop for risk assets to remain supportive (for at least a while longer). That said, we will closely monitor the labor market and the consumer for signs of further deterioration, which could impact our views and portfolio positioning.
Within US equity markets (S&P 500 Index) a handful of U.S. mega-cap technology stocks continue to surge higher. Through June, only 27% of stocks in the S&P 500 are outperforming the index, the lowest reading in more than 50 years. Moreover, the top 10 contributors have accounted for 70% of the S&P 500’s 15% year-to-date return. While the concentration levels at the index level are noteworthy, this trend could continue. The strong run for Artificial Intelligence (AI) stocks has been justified as companies such as Nvidia continue to deliver and beat earnings estimates. Moreover, expectations for future earnings growth are robust.
Our fixed-income positioning has modestly changed since last quarter. Nearly two years ago we purchased short-term Treasuries to hedge against rising rates. We believe that inflation is under control for now and that short-term interest rates have peaked and will likely decline slightly throughout the year. Consequently, we reinvested the proceeds of the matured Treasury into intermediate-term bonds, extending the average maturity of our bond portfolio.
For corporate bonds, we do not foresee a near-term risk of a spike in default rates given the still-attractive corporate fundamentals. In this environment we continue to take advantage of the inverted yield curve, emphasizing shorter-term higher-yielding securities while also maintaining some exposure to intermediate-term bonds. Our core bonds can also provide protection in the event of a stock market downturn.
CLOSING THOUGHTS
The U.S. economy looks set to benefit from a continuing gradual moderation in growth, inflation, and jobs, creating a backdrop that could support risk assets. As was the case last quarter, the stock market continues to hit new highs as economic growth has fueled corporate earnings. The S&P 500 concentration remains high with the Magnificent Seven representing over 25% of the index. There’s no doubt that the other 493 stocks of the S&P 500 have struggled on a relative basis, but they could be set to move higher if the key economic drivers outlined above continue to fuel the economy. That said, fears of a recession haven’t completely abated. Looking out to the end of the year and into next year, the question remains whether a recession will be avoided or delayed. We are keeping a close eye on the typical recession drivers, including the labor market, consumer spending, and corporate earnings, where a deterioration in these variables could influence portfolio positioning.
Heading into the second half of the year, we anticipate pockets of volatility given headline risks related to Fed policy, geopolitical events, and the upcoming U.S. presidential election. In the event of volatility, we will look to be opportunistic, taking advantage of any attractive risk/reward opportunities.
We thank you for your continued confidence and trust.