Q2 Phase Four Market & Economic Update: Inflation Eases, Focus on the Fed
I hope you're enjoying your summer! As we move into what is certainly going to be an interesting second half of 2024, let's review what happened in Q2.
Stock Market Performance
During the second quarter of 2024, the stock market had some significant movements:
The S&P 500 went up by about 3.90%.
The Nasdaq Composite rose nearly 8.1%.
The Dow Jones Industrial Average fell by around 1.7%.
Key Index Returns
Here's a quick snapshot of key index returns for June and year-to-date:
Dow Jones Industrial Average: +1.1% (MTD), +3.8% (YTD)
NASDAQ Composite: +6.0% (MTD), +18.1% (YTD)
S&P 500 Index: +3.5% (MTD), +14.5% (YTD)
Russell 2000 Index: -1.1% (MTD), +1.0% (YTD)
MSCI World ex-U.S.A.: -1.8% (MTD), +3.2% (YTD)
MSCI Emerging Markets: +3.6% (MTD), +6.1% (YTD)
Bloomberg U.S. Agg Total Return: +0.9% (MTD), -0.7% (YTD)
Sector Performance
Here’s how some different sectors performed in Q2 2024:
Technology: +11.40%
Basic Materials: -5.88%
Communication Services: +9.16%
Consumer Cyclical: -1.20%
Utilities: +4.48%
Industrials: -3.41%
S&P 500 Equal Weight Index
Unlike the market-cap-weighted S&P 500, the S&P 500 Equal Weight Index gives every stock equal importance. This index rose 3.25% this year but fell 3.1% in Q2. The performance gap between the equal-weighted and market-cap-weighted indexes highlights the concentrated gains in a few large companies, raising concerns about market breadth.
Phase Four Perspective: Despite the Dow's decline, the overall market performance was strong, driven mainly by tech and growth stocks, (especially the “Magnificent 7” in an ongoing AI-related growth theme) that have much higher representation in the Nasdaq and S&P 500. The differences between large company tech and other investable assets that would typically be in diversified, balanced portfolios (i.e. Mid and Small cap stocks, International, and Bonds) continues to be pretty staggering, leaving more Balanced/Moderate investors feeling good about total returns while still realizing that the diversifying (non-Large-Cap US stocks) and risk-reducing (Bonds and other Fixed Income) components have not been adding value currently. While we definitely have had a heavy focus on Large US stocks in client portfolios, as an advisor we need to keep an awareness of not moving overall risk too far out of individual investors’ comfort levels and maintaining diversification because we’ve all experienced how quickly narratives can change.
Economic Overview
At the start of the year, many market watchers projected up to six interest rate cuts. However, as persistent high inflation numbers were popping earlier in the year, those expectations changed to “maybe only one”. Now, with recent economic slowdown data (job growth slowing while credit card & auto loan delinquencies rising, etc) a rate cut at the September 18th meeting is now seen as very likely and maybe 1-2 more before the end of the year. There has been debate over whether a rate cut prior to the election would be seen as political, as some believe it could boost the economy and appear favorable to the current administration. Powell has stated a focus on separating from that and being focused on the data, but that will remain a key topic as we approach the election.
Inflation has shown signs of easing. The Consumer Price Index (CPI) indicated a year-over-year inflation rate of 3.3% in May. Core CPI, which excludes food and energy prices, dropped to a three-year low of 3.4%. This cooling inflation has been well-received by the stock market, helping the S&P 500 reach new highs.
The yield curve inversion (the unusual dynamic of short term rates being higher than long term rates), a historical indicator of economic downturns, has now lasted over two years. While it often signals a recession, the stock market has seen strong performance (thanks in large part to the fortunate timing of ChatGPT and the AI boom).
The job market remained stable with monthly payroll gains:
206,000 in June, 272,000 in May, and 175,000 in April
However, the unemployment rate increased to 4.1% in June, which is the highest since November 2021. This rise appears to be related to the Fed’s interest rate hikes finally slowing down the economy as was intended when they started the process.
Phase Four Perspective: While a higher unemployment rate might seem negative, the continued job gains suggest the economy is still creating new opportunities, even as it cools slightly. The Fed (with their focus on balancing economic growth with controlling inflation) has so far navigated a fairly “soft landing” compared to what most of us expected with the massive rate increases of 2022, but the concern has always been with letting the pendulum swing too far to really slowing economic growth and causing a lot of pain on the jobs side. Their decisions will be closely watched this fall, including the political factors, adding a layer of complexity to market predictions.
The contradiction of the market success in the face of the 2 year yield curve inversion shows the importance of staying at least mostly invested long-term and not making decisions based solely on historical adages (such as the saying "Sell in May and Go Away", which also did not hold true for the 2nd quarter for the second year in a row). Current market conditions need to be viewed uniquely as they are influenced by various factors, such as global events and technological advancements such as the impact of AI.
Final Thoughts
We are processing a lot of Midyear Outlooks and will provide a summary after reviewing some more scheduled for mid-July. While we know there will be plenty of noise around the elections, we believe economic fundamentals—such as the overall economy and corporate profits—will have the most significant impact on the major indexes in the near and medium term. If a major slowdown/recession occurs later this year or early next, we might see increased market volatility. However, a gentle economic slowdown that supports earnings would create a favorable environment for investors. Over the long term, the potential of AI to drive productivity and economic growth cannot be underestimated. It is an exciting time that will also require a lot of responsibility for those shaping it’s impact on the future.
As the role of AI is more integrated into the services we all use, it’s important to enhance the value of the human aspect. I believe that relationship and connection to your goals and the things that matter to you are what will shape our ability to successfully move forward. I intend to use the tools like anyone else to create efficiencies, but I will always value personal connection. Please let us know anything we can do to help.
All the best,
Jeff Boyd, CFP®, CEPA®
CERTIFIED FINANCIAL PLANNER™
Registered Representative offering securities and advisory services offered through Independent Financial Group, LLC (IFG), a Registered Investment Adviser. Member FINRA/SIPC. Phase Four Financial Solutions, Orion, and IFG are unaffiliated entities.
No investment strategy can guarantee a profit or protect against loss. The market indexes discussed are unmanaged and generally considered representative of their respective markets. Individuals cannot directly invest in unmanaged indexes. Past performance does not guarantee future results. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost. Diversification does not guarantee profit nor is it guaranteed to protect assets.
The information and opinions presented are for general information only and are not intended to provide specific advice or recommendations for any individual. Independent Financial Group (IFG) does not give tax or legal advice. IFG Registered Representatives (RR) do not give tax or legal advice while acting as an RR. You should contact your attorney, accountant or tax advisor with regard to your individual situation. The opinions of the presenter do not necessarily reflect those of Independent Financial Group, LLC, its affiliates, officers or directors.