Halftime!

July 7, 2024

Posted by Jason Edinger on Tue, 07/02/2024 – 11:22

First Half Highlights

Tempus fugit. An apt Latin reminder that time is fleeting. With the first half of 2024 already in the books, the year is flying by, and equity investors have been rewarded thus far with solid gains. All but one of the major indices (microcaps) were in the black for 1H, with the NASDAQ and S&P500 leading the way, lagged by the Dow and Russell 2000.

Year-to-date, size has mattered as large- and mega-cap stocks have decidedly outperformed their smaller brethren. Given massive weightings in their respective indices, the outperformance of large vs. small this year is mostly attributed to the robust gains of several mega-cap stocks, notably Microsoft, Nvidia, et al. The 2024 reality: it is all about tech and large-cap. Nevertheless, stocks overall have edged higher this year, turning in a great first half and extending the rally that began in October of 2022*.

The first half of 2024 was more challenging for the bond side of the ledger. Interest rates rose over the period, with the 10-year Treasury yield climbing from 3.9% in January to 4.6% by the end of May. This rising interest rate environment, which asserted itself across the entire yield curve, weighed on bond prices, keeping returns muted across most fixed income sectors. After a challenging 1H, current rate levels have set the stage for a better second half. Fixed income valuations look favorable across several sectors, with various investment-grade yields at or near their highest levels in a decade. Spreads remain tighter than historical averages, but the higher absolute yields should be supportive of more appealing fixed-income returns on a go-forward basis.

We would be remiss to discuss the bond environment without spending a few words on the Federal Reserve and inflation. The latter has proven to be stubbornly sticky this year, putting upward pressure on interest rates and, by extension, the Fed. Owing largely to better-than-expected economic data, the markets have hawkishly repriced their expectations on the interest rate front, with only one or two cuts remaining possible this year. Nevertheless, the overall trend is toward disinflation and softening economic data, which should give the central bank enough cover to either a) signal even more accommodative future monetary policy or b) simply begin cutting interest rates altogether. If either of these scenarios play out, it could spark a rally for bonds to close out the year.

Looking Ahead: Glass Half Risky?

Inflation remains front of mind for investors and economists. Although inflation continues to move in the right direction, the risk of a re-acceleration is very real, and any upward surprise in the data could cause serious disruptions in both stock and bond markets.

Investors don’t seem to care much about the narrow market breadth we are currently seeing. As mentioned above, the market rally has been driven primarily by just a handful of stocks (only 60% of S&P500 constituents are positive this year), which can be interpreted as a sign that the broad indices are poised for a correction deeper than any we have seen this year. There is the chance that mega-cap stocks have run too far too fast, and the markets spent the better part of June consolidating after one of the most bullish 5-month periods on record. They may have trouble getting re-energized for the remainder of the year.

Finally, markets do not seem worried about war or politics. The ongoing war in Ukraine, continued conflicts in the Middle East, and China’s economic slowdown all have potential to cause further regional and global uncertainty that could spill over to the broader world economy in the second half of the year.  In addition, we face considerable political instability due to the U.S. elections in November. We’re likely to see this uncertainty ramp up as the political convention season kicks off this summer and we get closer to election day.

Glass 6/10ths Full

The good news is that our economy and capital markets are incredibly dynamic and resilient. We expect economic growth, while moderating somewhat, to remain broadly positive and should help the fight against inflation. Stock fundamentals are in solid shape, and total return prospects for bonds are looking as good now as they have in a very long time. Finally, we have a Federal Reserve who has made it crystal clear that its next move is a rate cut. That recipe – slowing inflation, decent growth and lower interest rates – should favor the optimists. While there are risks, we remain overall bullish on the markets as we kick off the year’s back half.

As ever, we thank you for your continued trust and support.

* chart source: NASDAQ

All indices are unmanaged, and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance does not guarantee future results.