2Q24 — A Tale of Two Markets
Investors entered the year hopeful that the Federal Reserve might cut interest rates as
many as six times in 2024. By the end of the second quarter, however, expectations
had dropped to only one or two possible cuts. Incredibly, the financial markets
have remained resilient despite such a large shift in consensus. Long-term
interest rates have risen so far in 2024 but remain mostly rangebound over the
past year. Meanwhile, the stock market has impressively withstood higher rates
and a slowing economy, though to varying degrees depending on how one measures
the market. The popular averages that are dominated by a handful of huge,
mega-cap companies, such as the S&P 500 and NASDAQ 100, have performed exceedingly
well, though broader measures have noticeably lagged as fewer stocks
participate in the rally. This “Tale of Two Markets” has made for a more
difficult environment, though one still without significant pullbacks in the
major indices.
Equities
The biggest story for equities in the second quarter was an acceleration in the narrowing out that began in the first quarter. In other words, fewer stocks went up and
more went down than earlier in the rally that began last October. By the end of
the second quarter, the S&P 500 had hit a number of new all-time highs, yet
only about half of stocks on the New York Stock Exchange were even above their
50-day moving averages, a measure of being in an uptrend. Contrast this with the
end of 2023 when as many as 87% of NYSE stocks were above their 50-day moving
average. What’s more, the Value Line Geometric Index, a stock gauge containing
approximately 1,6756 companies from the NYSE, American Stock Exchange, NASDAQ,
and OTC Market, which I believe better approximates the “median” stock in the
market than the other major averages, actually finished the second quarter down
on the year versus an almost 15% gain in the S&P 500. The
disparity between the performance of the “typical” stock in the market and the
S&P 500 is historically wide. It is widely believed this poor breadth has
made it almost necessary to be as concentrated in the top stocks as the averages
are or risk underperforming. As a result, investors continue to pile into an
ever-narrowing number of companies, which may increase the market risk if these
stocks experience their own period of underperformance.
Bonds
The bond market has suffered from the sharp turnabout in expectations for imminent rates cuts from the Federal Reserve. The benchmark 10-Year U.S. Treasury yield
plummeted from around 5% last October to 3.78% by the end of 2023 as the market
priced in those six potential cuts. This drop in rates sent bond prices skyward
as a result, though since then the 10-Year has chopped back and forth, topping
out around 4.75% in late April before retreating back lower. The uncertainty of
the Fed’s future path resulted in rangebound, flattish action in the bond
market in the second quarter. If inflation and economic measures continue to
moderate, it is widely expected that rate cuts will still happen this year, though
how aggressive the Fed chooses to be with said cuts over the coming year will
likely have a large impact on both rates and bond prices.
Commodities
Commodity indices were also largely rangebound in the second quarter, though, as usual, there were differences among individual commodities. A combination of a slowing global economy and a higher U.S. Dollar Index, a measure of the U.S. dollar’s value relative to the majority of its most significant trading partners, has put some
downward pressure on areas like Crude Oil. The price of West Texas Intermediate
Crude (the primary measure of U.S. prices) began the quarter around $83/barrel
but fell as much as $10 below there in early June before rallying back up
toward its origin. Meanwhile, Gold prices finished slightly up on the quarter, but
basically traded sideways near all-time highs after initially jumping higher in
early April. Commodities, overall, appear to be getting pulled in two different
directions – inflation expectations remain comparatively high relative to
recent history, though a slowing economy may continue to put downward pressure
on the more growth-oriented commodities like Oil. Should Oil prices surprise
the market, however, by going significantly higher, that may help to keep inflation
higher for longer and prevent the Fed from being aggressive with their rate
cuts.
Conclusion
It was a relatively calm quarter despite the stock market getting off to a rockier start
in the first half of April. Investor focus remains on inflation measures and
whether they will allow the Federal Reserve to cut interest rates later this
year. And then, of course, we are getting closer to the U.S. presidential
election in November and market attention will likely shift toward the polls as
the summer continues. Historically, the stock market has experienced a
seasonally rougher patch, on average, in the months leading into a presidential
election. We can never rely solely upon seasonality, though it is something to
keep in mind as a narrowing and still historically overvalued stock market
nears election day. Investors tend to overweight the importance of elections
and politics in the market, yet the combination of uncertainty from the Federal
Reserve, geopolitical risks, and a high-profile election could produce more
volatility in the months to come than the financial markets have experienced so
far in 2024.
Any opinions are those of Caliber Wealth Managementand not necessarily those Raymond James Financial Services, Inc., or of Raymond
James. The information contained in does
not purport to be a complete description of the securities, markets, or
developments referred to in this material. There is no assurance any of the
trends mentioned will continue or forecasts will occur. The information has
been obtained from sources considered to be reliable, but Raymond James does
not guarantee that the foregoing material is accurate or complete. Any
information is not a complete summary or statement of all available data
necessary for making an investment decision and does not constitute a
recommendation. Investing involves risk and you may incur a profit or loss regardless
of strategy selected, including diversification and asset allocation.
Investing
in commodities is generally considered speculative because of the significant
potential for investment loss. Their markets are likely to be volatile and
there may be sharp price fluctuations even during periods when prices overall
are rising. Gold is subject to the special risks associated with investing in
precious metals, including but not limited to: price may be subject to wide
fluctuation; the market is relatively limited; the sources are concentrated in
countries that have the potential for instability; and the market is
unregulated.
The
S&P 500 is an unmanaged index of 500 widely held stocks that is generally
considered representative of the U.S. stock market.
There
is an inverse relationship between interest rate movements and bond prices.
Generally, when interest rates rise, bond prices fall and when interest rates
fall, bond prices generally rise.
The
NASDAQ-100 (^NDX) is a stock market index made up of 103 equity securities
issued by 100 of the largest non-financial companies listed on the NASDAQ. It
is a modified capitalization-weighted index. It is based on exchange, and
it is not an index of U.S.-based companies.
