Q2 2024 - A Market Review
Stocks experienced their first dose of 2024 volatility early in Q2, but interest rate cut expectation, solid economic growth and continued AI hype eventually pushed the major indexes to solid gains.
While the S&P 500 hit new highs in the second quarter, the month of April was decidedly negative for markets as fears of no rate cuts in 2024 (or even a rate hike!) pressured stocks. The catalyst for these concerns was the March Consumer Price Index (CPI), which rose 3.5% year over year, higher than estimates. That hotter-than-expected reading reversed several months of declines in CPI and ignited fears that inflation could be “sticky” and, if so, delay expected Fed rate cuts.
Those higher rate concerns were then compounded by comments by New York Fed President John Williams, who stated that further rate hikes (which investors assumed were over) were possible if inflation showed signs of re-accelerating. The practical impact of the hot CPI report and William’s commentary was to push rate cut expectations out from June to September and that caused the 10-year Treasury yield to rise sharply, from 4.20% at the start of the quarter to a high of 4.72%. Those higher yields pressured the S&P 500 in April, which fell 4.08% and completed its worst month since the previous September.
On the first day of May, however, the Fed largely dispelled concerns about potential rate hikes and ignited a rebound that ultimately carried the S&P 500 to new highs. At the May Fed meeting, Chair Powell essentially shut the proverbial door on the possibility of rate hikes, stating that if the Fed was concerned about inflation, it would likely just keep interest rates at current levels for a longer period instead of raising them. That comment provided immediate relief for investors and both stocks and bonds rallied early in May as rate hike fears subsided.
Then, later in the month, the April CPI report (released in mid-May) showed a resumption of disinflation and further increased expectations for rate cuts in 2024. Additionally, employment data moderated in May, with the April jobs report coming in below expectations (but still at healthy levels). The practical result of lower inflation, the supportive Fed commentary and moderating labor market data was to increase September rate cut expectations, push the 10-year Treasury yield back down below 4.50% and spark a 5% rally in the S&P 500 in May.
The upward momentum largely continued in June thanks to more positive news on inflation, additional reassuring commentary from the Fed and strong AI-linked tech earnings. Core CPI dropped to the lowest level since April 2021, further confirming ongoing disinflation. Then, at the June Fed meeting, Chair Powell reassured markets that two rate cuts were entirely possible in 2024, reinforcing market expectations for a September cut.
Economic data, meanwhile, showed continued moderation of business activity and that slowing growth and still-falling inflation helped to push the 10-year Treasury yield close to 4.20%, a multi-month low. Finally, investor enthusiasm for AI remained intense in June, as strong AI-driven earnings from Oracle (ORCL) and Broadcom (AVGO) along with news the that Apple (AAPL) was integrating AI technology into future iPhones pushed tech stocks higher and that, combined with falling Treasury yields and rising rate cut expectations, sent the S&P 500 and the NASDAQ to multiple new all-time highs.
Q2 Performance Review
The second quarter produced a more mixed performance across various markets than the strong returns in the S&P 500 and the NASDAQ indexes might imply, as AI-driven tech-stock fervor again powered the both these indexes higher while others lagged. The NASDAQ was by far the best performing major index in the Q2 while the S&P 500, where Technology is the largest sector weighting, also logged a solidly positive gain. Less tech-focused indexes didn’t fare as well, however, as the Dow Jones Industrial Average, the S&P Mid Cap 400 and the Russell 2000 Small Cap indexes posted negative quarterly returns.
By market capitalization, Large Caps seriously outperformed Mid and Small Caps in Q2, as they did in Q1. Initially, higher Treasury yields in April weighed on the smaller names, while late in the second quarter it was economic growth concerns that pressured both the Mid and Small Cap indexes.
From an investment style standpoint, growth massively outperformed value in the second quarter, as tech-heavy growth funds once again benefited from seemingly never-ending AI enthusiasm. Value funds, which have larger weightings towards financials and industrials, posted a slightly negative quarterly return as the performance of non-tech sectors more reflected growing concerns about economic growth.
On a sector level, performance was decidedly mixed as only four of the eleven S&P 500 sectors finished the quarter with positive returns, despite the solid performance of the stock indexes - an indication of the lack of breadth of the rally.
The best performing sectors in the second quarter were the AI-linked Technology and Communications Services sectors. They posted strong returns, aided by better-than-expected earnings results from Nvidia (NVDA), Microsoft (MSFT), Amazon (AMZN), Oracle (ORCL), Broadcom (AVGO) and others as AI enthusiasm continued to push the broad tech sector and S&P 500 higher. The Utilities sector also logged a modestly positive quarterly return, as the high yields and resilient business models were attractive to investors given rising concerns about future economic growth, while declining Treasury yields made higher dividend sectors such as utilities more attractive to income investors.
Turning to the sector laggards, the Energy, Materials and Industrials sectors closed Q2 with modestly negative returns. Their declines reflected growing anxiety about future economic growth as those sectors, along with Small Cap stocks, are more sensitive to changes in U.S. and global growth.
US Equity Indexes Q2 Return
Internationally, Emerging Markets outperformed the S&P 500 in Q2 thanks to optimism towards a rebound in Chinese economic growth and as falling global bond yields late in the quarter boosted the attractiveness of emerging market investments. Foreign Developed Markets, meanwhile, lagged both emerging markets and the S&P 500 and posted a fractionally negative quarterly return. Concerns about the timing and number of Bank of England and European central bank rate cuts, along with French and German political concerns later in the quarter, acted as headwinds for foreign developed equities.
International Equity Indexes Q2 Return
Commodities saw slight gains in Q2 thanks to aforementioned optimism on Chinese economic growth and as geopolitical concerns rose throughout the quarter. Gold rallied solidly on the uptick in geopolitical risks, following tit-for-tat strikes between Israel and Iran, along with the ongoing conflict in Gaza. Oil, meanwhile, logged a small loss on signs of slipping OPEC+ production discipline and concerns about future global growth and demand.
Commodity Indexes Q2 Return
Switching to fixed income markets, the leading benchmark for bonds (Bloomberg Barclays US Aggregate Bond Index) realized a slightly positive return for the second quarter, as rising expectations for a September Fed rate cut and moderating U.S. economic growth boosted bonds broadly.
Looking deeper into the fixed income markets, shorter-duration bonds outperformed those with longer durations, as bond investors priced in sooner-than-later Fed rate cuts. Longer-dated bonds, meanwhile, were little changed on the quarter despite the return of disinflation and moderating U.S. economic growth.
Turning to the corporate bond market, lower-quality, but higher-yielding “junk” bonds rose modestly in the second quarter while higher-rated, investment-grade debt logged a slight decline. That performance gap reflected continued investor optimism towards corporate profits despite some disappointing economic reports, which led to bond investors taking more risk in exchange for a higher return.
US Bond Indexes Q2 Return
Q3 2024 Market Outlook
Stocks begin Q3 2024 mostly riding a wave of optimism and positive news as inflation seems to be declining in earnest again, the Fed may deliver the first rate cut in over four years this September, economic growth remains generally solid and substantial earnings growth from AI-linked tech companies has shown no signs of slowing down.
Those positives and optimism are reflected in the fact that the S&P 500 has made more than 30 new highs so far in 2024 and is trading at levels that, historically speaking, are richly valued. That said, if inflation continues to decline, economic growth stays solid and the Fed delivers on a September cut, absent any other major surprises, it’s reasonable to expect this strong rally which dates back to late 2023 to continue in Q3 2024.
However, while the outlook for stock indexes is positive right now, market history has shown us that nothing is guaranteed. As such, we must be constantly aware of events that can abruptly change the market dynamic, as we do not want to get blindsided by sudden volatility.
To that point, the market does face risks as we enter the third quarter. Slowing economic growth, disappointment if the Fed doesn’t cut rates in September, underwhelming Q2 earnings results (which start coming out later this month), a rebound in inflation and geopolitical surprises (including the looming U.S. elections) are all potential negatives. And, given high levels of investor optimism and current market valuations, any of those events could easily cause a pullback in stock markets similar to or worse than what we experienced in April.
While any of those risks (either in isolation or in combination) could result in a sharp drop in stocks or bond prices of 5%-10% or more, the risk of slowing economic growth is perhaps the most substantial threat to this powerful 2023/2024 rally. For the first time in years, economic data is pointing to a clear loss of economic momentum.
So far, the market has welcomed such growth moderation because it increases the chances of a September rate cut. However, if growth begins to slow even more than expected and concerns about an economic contraction - or even a recession - increase, that would be a new, material negative for markets since a rapidly deteriorating economy is not at all baked in to current stock prices. Because of that risk, we need to be monitoring economic data very closely in the coming months.
Bottom line, the outlook for stocks remains positive but that should not be confused with a risk-free environment. There are genuine risks to this rally slowly building on the horizon.
History has demonstrated that a well-planned, long-term focused and diversified financial plan and investment strategy can withstand virtually any market surprise and related bout of volatility.
I remain constantly vigilant on behalf of Anglia Advisors’ clients regarding both portfolio risk and the economy and will continue to keep you informed of my opinions with my weekly market review every Sunday.
If you are already a client, I want to thank you for your ongoing confidence and trust. Please do not hesitate to contact me with any questions, comments or to schedule a portfolio review.
If you aren’t a client yet, please reach out and I’d be delighted to discuss bringing you into the Anglia Advisors family.
Simon Brady CFP® CETF®. Founder, principal Anglia Advisors.
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