“It was the best of times, it was the worst of times..” 1
-Charles Dickens
As we reflect on the second quarter of 2024, it undoubtedly proved to be another solid quarter for risk assets as the S&P 500 Index delivered a total return of 4.3%2. All despite ongoing geopolitical uncertainty, the angst around growing government deficits, and of course an upcoming election that is as predictable as my two-year-old.
The second quarter was characterized by:
- Declining economic surprises, meaning economic reports did not exceed expectations.
- Inflation continued to decelerate closer to the Federal Reserve’s target.
- A softening labor market, thus providing a better balance of job seekers and openings.
The backbone of the economy remains the consumer as consumption accounts for roughly 70% of US GDP4. Consumers are becoming more discerning, which has created idiosyncratic winners of consumer wallet share across the economy.
Furthermore, consumers continue to place a high value on experiences as travel is at record levels. For example, July 6th was the first time in history that the Transportation Security Administration reported over 3 million travelers passed through airport security in a single day5.
So, while the consumer is more choosey, they remain confident. A lot of factors play into this – low unemployment, solid wage growth, and the wealth effect as higher investment accounts and home prices breed confidence. If we decompose the consumer balance sheet, most consumer debt is their home and for many it’s fixed at rates far below current market rates. This is a powerful effect that is well known, but potentially still underappreciated by economists and strategists.
With slowing growth, moderating inflation, and a better-balanced labor market, the market has begun to anticipate interest rate relief is coming and soon. Current market expectations are for roughly two 0.25% interest rate cuts in 2024 with the first occurring at the Fed’s September meeting7.
Reducing interest rates to be less restrictive may provide various economic benefits, including:
- Support for economic growth, which has shown clear signs of deceleration.
- With steady economic growth comes a higher likelihood unemployment stays lower.
- Relief to economic sectors that may be experiencing a rolling recession, such as housing.
Housing will be one of the most immediate areas consumers will feel the effect of interest rate relief. For sellers, over 40% of homeowners have either no mortgage or for those that do, over 80% have mortgages below 4%8. Meanwhile, buyers are contending with mortgage rates that are elevated to recent history and home prices that are historically high9. This dynamic has significantly slowed activity in the housing market as shown below2. Rate relief likely would spur more transactions.
As we look to the second half of 2024, the backdrop is constructive for risk assets. Dating back to 1900, there have been 25 years where the S&P 500 is up more than 15% during the first half of the year10. Nineteen of those 25 years the returns were positive in the second half with a median return of 8.9%10. Furthermore, we’ve had very little volatility year-to-date and it’s an election year with an incumbent running. Both are additional positives historically for stocks.
An ongoing challenge for most investors is the level of concentration within the S&P 500 Index. The 10 largest stocks accounted for 37.5% of the index weight and 77.2% of the return of the index for the year through June 30th 11. One stock, Nvidia, alone accounted for roughly 32% of the index return11.
If we were to observe other stocks outside of the 10 largest “catch up” to the rest of the market, meaning growth and returns broaden, we would view that as a positive development and potentially a catalyst to further extend the current bull market. In this scenario potential beneficiaries may include small caps, financials, and industrials which are more cyclical and have lagged the broader market.
For markets, risk is always constant, and something we surgically manage. Often, the greatest risk is the one you don’t see coming. Two risks in the second half we expect to be of focus are:
- Higher valuations lead to higher expectations. Second quarter earnings will be watched closely to see how optimistic companies are about their prospects going forward.
- Volatility in the run up to the election. While over the long-term mixing political views and investing is bad business, in the short-term political posturing may impact sector performance given sentiment.
Overall, we remain optimistic as we head into the second half of the year and are excited about the opportunities that are in front of us. It would certainly not come as a surprise to our team to see some form of a sell-off or correction in stocks given the robust returns year-to-date. Seeing risk assets take a breather is healthy in the lifecycle of a bull market.
It’s with gratitude that we continue to serve you. Have a wonderful summer.
Bryce Goldbach, CFA
Portfolio Manager & Wealth Strategist
7/8/2024
CITATIONS
[1] https://www.goodreads.com/quotes/341391-it-was-the-best-of-times-it-was-the-worst
[2] https://www.strategasrp.com/ “Quarterly Review in Charts Monday, July 1, 2024.”
[3] https://cbonds.com/indexes/99130/ “USA Citigroup Economic Surprise Index.”
[4] https://am.jpmorgan.com/us/en/asset-management/protected/adv/insights/market-insights/guide-to-the-markets/ “Guide to the Markets as of June 30, 2024.”
[5] https://www.wsj.com/lifestyle/travel/daily-travelers-passing-through-u-s-airport-security-top-3-million-for-first-time-53b63a10 “Daily Travelers Passing Through U.S. Airport Security Top 3 Million for First Time.”
[6] Goldman Sachs “Economics Research as of July 1, 2024.”
https://publishing.gs.com/content/research/en/reports/2024/07/01/0aad4faf-6f70-4297-9ee0-a0a492b1f65b.html
[7] https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html “CME FedWatch.”
[8] Janus Henderson Investors. “Fixed Income Playbook as of 12/31/2023.”
[9] https://www.wsj.com/economy/housing/home-prices-hit-a-record-high-4028acf2 “Home Prices Hit a Record High.”
[10] https://www.gsam.com/content/dam/gsam/pdfs/common/en/public/articles/market-pulse/us/2024/July-Market-Pulse.pdf?sa=n&rd=n “Market Pulse as of July 2024.”
[11] https://www.strategasrp.com/Document/Index?strResearchProductID=YM89P3JT5YfGytcZU07o2 g%3d%3d “ETF Research as of Tuesday, July 2, 2024.”
DISCLOSURES
This report was prepared by Asio Capital, a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Form ADV Part 2A & 2B can be obtained by visiting https://link.edgepilot.com/s/849e5eac/xrcqBzdw_UKkcOoJYdvT8g?u=https://adviserinfo.sec.gov/ and search for our firm name. Neither the information nor any opinion expressed it so be construed as solicitation to buy or sell a security of personalized investment, tax, or legal advice. This is prepared for informational purposes only. It does not address specific investment objectives, or the financial situation and the particular needs of any person who may receive this report.
S&P 500 measures the performance of 500 widely held stocks in US equity market. Standard and Poor’s chooses member companies for the index based on market size, liquidity and industry group representation. Included are the stocks of industrial, financial, utility, and transportation companies. Since mid-1989, this composition has been more flexible and the number of issues in each sector has varied. It is market-capitalization weighted.