Half of 2024 is officially behind us, and markets are still up, short-term bond yields remain high, the Federal Reserve has yet to lower rates, and chances of recession are muted. The S&P 500 is up 15% year-to-date (YTD) and Technology and Communication sectors are back in the lead. The largest stocks rallied in Q2, with NVIDIA coming in as the best performer of the S&P 500 in the second quarter. Developed international stocks and Emerging Markets, while positive YTD, continue to lag the S&P’s YTD returns, however, Emerging Markets outperformed the S&P 500 for the quarter. Short-term bonds continue to outperform intermediate- and long-term bonds, and money market yields remain high. *
Interest Rates and Labor Market
On the other hand, high yields on savings come with high interest rates on borrowing and consumers continue to feel the pinch. The average 30-year fixed mortgage rate remains above 7%, and interest rates on credit cards continue to climb. The Fed has certainly achieved its goal of making borrowing more expensive, and we’re finally seeing signs of consumer spending leveling out. Inflation and subsequent higher prices seem to be affecting consumer preferences, along with the performance of certain stocks (e.g. Walgreen’s, Ulta, lululemon). Perhaps because of these factors, large cap growth stocks with exceptional earnings and plenty of cash on hand continued to outperform in Q2.
The labor market has also begun to show signs of weakness. The U.S. added 206,000 jobs in June but saw downward revisions to prior months’ data. The unemployment rate rose from 4% to 4.1% and temporary help payrolls continued to weaken. Average hourly earnings are up 3.9% since last year but are still at the lowest annual rate we’ve seen in 3 years. The labor force participation rate rose to 83.7%, but an aging population, lower birth rates, and depressed levels of immigration continue to be headwinds. The changes are small, and the unemployment rate remains historically low, but data indicates that the red-hot labor market is beginning to cool.
The Fed has held interest rates at 5.25%, the highest level in almost 20 years, for 11 months now. June’s inflation numbers came in better than expected at 3.3% per year. International Central Banks have already initiated rate cuts and the Fed is monitoring the labor market closely for the first signs of weakness. It appears the data and market expectations are finally aligning. Language from the Fed is beginning to soften and analysts are projecting the first rate cut in September. All signs indicate the Fed may be closing in on the elusive “soft landing”: bringing inflation in line without causing a recession.
Large Cap Stocks and the Magnificent 7
Looking forward into the second half of 2024, market data remains strong and it’s difficult to foresee significant changes. While we may not have another 15% rise in the market, there’s little indicating a major reversal is looming. We’ve noted higher-than-average valuations in the market, however, earnings continue to come in strong and there’s no indication of broad-based euphoria in the market. Consensus earnings for the remainder of the year and 2025 continue to expand. Net inflows into the equity market remain below average, hinting there may still be cash on the sidelines that could move into the market. The bull case for equities remains intact.
The returns of the largest stocks and mentions of the Magnificent 7 have increased since last quarter when we noted the equal weighted index was catching up, however it’s unclear if this is a negative indication for future market returns. The 10 largest stocks in the S&P 500 make up 38% of the index and 31% of net income. They’re modern-day monopolies whose earnings are growing faster than the average stock and the economy, so it makes sense they should be a larger part of an investment portfolio. This is also why most investors use market cap weighted index funds. However, it’s important to note the current divergence between the equal weight and market cap indexes. In the past, such reversals have been sudden and volatile.
Moving Forward
Current market concentration and the Magnificent 7 provide an excellent example of why we believe diversification is essential when investing. It’s important to consider how your portfolio is constructed. While U.S. Large Cap Equities have a history of stellar performance, they are rarely the top performing asset class overall. Not many analysts anticipated emerging markets outperforming the S&P 500 in Q2. Moves in Emerging Markets, Mid Cap, and Small Cap stocks can be sudden and difficult to time. This is why long-term investors should not own only one segment of the market. Using a diverse portfolio that includes global equities, mid and small cap equities, as well as fixed income can create more consistent, predictable returns. It can also be tailored to specific goals and risk tolerance, allowing a personalized approach to investing. We believe there is no “one size fits all” approach to investing, and diversification is proven to add value across multiple market environments. A professional manager can help guide this process, and we hope you’ll reach out if SIMA can help you navigate your investment goals.
*Individual returns will vary based on percentage allocated to equity, fixed income, and cash
Heather A. Voight, AIF® | Portfolio Manager
Previous Market Commentaries
2024 First Quarter Market Commentary
2023 Fourth Quarter Market Commentary
2023 Third Quarter Market Commentary
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