The Quarter In Review | 2Q 2024
Global stocks slowed after their strong start to 2024, with the MSCI All Country World IMI Index returning 2.4% in the second quarter. Emerging markets led the pack, with the MSCI Emerging Markets IMI Index returning 5.1%, followed by the U.S. as measured by the Russell 3000 at 3.2%, and finally developed ex U.S. markets as measured by the MSCI World ex USA IMI Index at -0.7%.
In the U.S., the Federal Reserve held interest rates steady but revised its outlook for rate cuts amid inflation concerns. Yet globally, as the inflation outlook improved, the Bank of Canada and the European Central Bank cut interest rates after several months of holding rates steady. IT stocks led the stock market gains, as NVIDIA, Apple, and Microsoft were the top contributors to global market returns. Fueled by the market’s continued focus on AI, mega cap technology stocks drove positive performance within the U.S., with NVIDIA briefly surpassing Apple and Microsoft as the largest stock in the world by market capitalization.
Communication Services was the next best performing sector, as stocks such as Alphabet and Meta also contributed positively to global market returns this quarter. Real Estate Investment Trusts (REITs posted negative returns for the second consecutive quarter.
Globally, value stocks trailed growth stocks and small caps trailed large caps. Despite the underperformance of size and value, profitability was a bright spot in the premium environment, as stocks with higher profitability generally outperformed their lower profitability counterparts.
FIXED INCOME
Federal Reserve policy expectations continued to drive the bond market. U.S Treasury yields initially rose in the second quarter on stronger-than-expected inflation readings, only to trend lower as other economic indicators suggested that the disinflationary trend was resuming. There is still the expectation of at least one rate cut this year, possibly more due to recent negative economic data.
In terms of total returns, the U.S. Aggregate Bond Index rose modestly, up 0.07% for the quarter ending the past 12 months up a mere 2.63%.
ALTERNATIVES
The Bloomberg Commodity Total Return Index returned +2.89% for the second quarter of 2024. Unrest and escalating tensions in the Middle East continue to drive uncertainty about future oil and gas prices. Precious metals continued their upward ascent as the price of Gold hit record highs @ $2,400 per ounce, up 30% this year.
Coffee and Zinc were the best performers, returning +20.96% and +18.78% during the quarter, respectively. Cotton and Lean Hogs were the worst performers, returning -21.81% and -11.74% during the quarter, respectively.
U.S. REITs eased them, down -0.16% for the first quarter but still up +7.15% over the last 12 months.
ECONOMY
As Dr. David Kelly, J.P.Morgan Asset Management’s chief global strategist recently noted: “The mood on the economy has changed quite quickly. The economic headline from just 12 days ago was that real GDP growth had, yet again, surprised to the upside, coming in at a robust 2.8% for the second quarter, well above the 2.1% consensus expectation. Since then, however, we have seen higher-than-expected weekly unemployment claims and weak readings on construction, durable goods orders, home sales and manufacturing activity. This was topped off, on Friday, August 2nd, by a softer-than-expected employment report, both in terms of payroll job gains and the unemployment rate.”
The labor market is not as tight as it once was with Job Openings, a measure of labor demand, down to 8.2 million at the end July, the lowest level since February 2021 and nearly 4 million off the peak of over 12 million job openings in March 2022. As a further sign of a cooling labor market, the U.S. economy added just 114,000 jobs in July, marking one of the worst months for hiring in years. Meanwhile, the unemployment rate rose to 4.3%, still low from historical standards but a sharp increase from January’s 3.5% rate.
The long-term effects of higher inflation, combined with the cooling labor market, led to a drop in consumer sentiment. The University of Michigan sentiment index fell from 69.1 to 66.4 in July – an eight-month low.
On the positive side, capital spending appears remarkably resilient, with real business fixed investment climbing 3.6% in the year ended in the second quarter. This growth is driven by increased capital investments among technology companies as more data centers are being built in the United States. Alphabet, Amazon, Meta and Microsoft have all announced they will increase capital expenditure from roughly $120 billion in 2023 to an estimated $180 billion in 2024, a 50 percent increase in just one year.
NATIONAL DEBT
The federal government now pays over$1 trillion in interest expenses annually, this exceeds our annual defense budget by a widening margin. The federal budget deficit for just the first six months of fiscal 2024, ending in March, was $ 1.064 trillion; total National Debt now exceeds $35 trillion.
The Congressional Budget Office (CBO) projects that by 2053 interest payments will make up 23% of total spending. The problem of the increasing debt burden has been made worse by the Fed's strategy of borrowing short-term to keep longer rates down, resulting in a record roughly $9 trillion in government debt maturing over the next year and will have to be re-financed at possibly higher rates.
LOOKING FORWARD
Softer economic data, combined with further signs of diminished inflation, had already led the Fed to signal an intention to cut rates in September. As of this week, futures markets have priced in a 50-basis point cut in the federal funds rate in September and an additional 125 basis points in cuts by the end of this year.
This change in the outlook for the economy and interest rates has helped cut the yield on a 10-year Treasury from 4.48% at the start of July to just 3.79% today. Meanwhile, since peaking in the middle of last month, the S&P500 has fallen by almost 7%; the Nasdaq is down over 12% and Japan’s stock market (Nikkei) is down over 18%.
Regardless of the dire picture painted by news outlets, a steep market downturn is a natural part of a healthy economic cycle. By definition, when markets experience a pullback of 10% to 20%, that is defined as a “market correction.” When a decline is larger than 20%, markets are in a “bear market”. While a market decline can be caused by many different factors, it’s often a signal that investor sentiment has shifted. Based on the last week, the Nasdaq and Nikkei markets are currently in correction territory.
Fortunately, market corrections are usually a short-term event, occurring on average every two years. The average market loss during a correction is about 13%, and historically, that loss has been recovered over a period of about four months. It’s important to note, however, that each situation is different, and it’s impossible to know exactly when the markets will turn around. The only certain thing with investing is uncertainty.
A look back at recent history makes a case for sticking with a plan. As outlined on the chart below, markets have rewarded those who have stayed invested after experiencing 10%, 20% and even 30% market declines. Although the chart is only through 2021, it reflects market history over a 90 year period including the COVID market sell-off of 2020.
SUMMARY – AND RATIONALE FOR CALM IN THE NEAR TERM
At times like these, instead of panicking, the best action is to turn to your investment plan. Your plan is designed with your long-term goals in mind and is based on principles that you can stick with, given your personal risk tolerances. While every client’s plan is different, ignoring headlines and focusing on time-tested principles can help avoid making shortsighted missteps.
Remember, we’re here to help. This also is where the time invested upfront with each of you shows its value. Formulating a solid and adaptable financial plan together and discussing liquidity, cash flows, and reserves provides the solid footing needed for times like these with many changing facets.
We appreciate the opportunity to work with each of you. We recognize that each client’s situation is unique and incorporates different factors into their investment and financial plan.
As always, if you have any questions or concerns about current market trends and the impact on your personal situation and plan, please contact us and we would be happy to discuss them with you.
Please follow this link to read the complete Quarterly Market Review (QMR) - 2Q 2024.