Second Quarter Market Review and Commentary

Investors entered the second quarter nervous about the inflation outlook as markets had pared back their expectations for Fed rate cuts from five at the start of the year. he market rally continues and broadens as multiple expansion drives gains despite stubborn inflation and attention remaining focused on the Fed’s actions.

A series of hotter-than-expected inflation readings in April reduced the probability of rate cuts further which in turn sent stocks and bonds lower.  Lower rates are seen as bullish for stocks as they make their cash flows more valuable (lower discount rate) and make bonds less attractive.  In May, both markets began to lift as the outlook for inflation cooled.  By the end of June, inflation news turned favorable. Investors became more confident in the Fed lowering rates in September which led to stocks regaining their footing.  As we start the third quarter, the current consensus is that the Fed will only cut rates once this year.

Turning to the stock market, while not as strong as the first quarter, the second quarter returns were good for the S&P 500 index as it gained 4.27% (+15.29% YTD).  The Nasdaq composite index had an even better performance, advancing 8.26% for the quarter (+17.47% YTD).  Other major indexes fared much worse as the Dow Jones Industrial Average was down 1.27% (+4.79% YTD) and the small-cap index, as measured by the Russell 2000 index, was down 3.28% (+1.73% YTD).

At first glance, the outsized performance of the first two benchmarks suggests most stocks had a great first half.  That is not the case, though.  The biggest story behind these numbers is that the breadth (a measure of the number of stocks participating) of the rally in equities this year has been one of the narrowest in history.  “The Magnificent Seven” (NVIDIA, Amazon, Microsoft, Alphabet, Apple, Meta, and Tesla) accounted for an outsized percentage of the total gains.  In the second quarter, those seven stocks accounted for 76% of the S&P 500 gain.  There has been tremendous excitement around Artificial Intelligence (AI) and these stocks have greatly benefited from the hype.

Performance of “Magnificent 7” stocks in S&P 500*

Indexed to 100 on 1/1/2021, price return

Source: FactSet, Standard & Poor’s, J.P. Morgan Asset Management. *Magnificent 7 includes AAPL, AMZN, GOOG, GOOGL, META, MSFT, NVDA and TSLA. Earnings estimates for 2024 are forecasts based on consensus analyst expectations. **Share of returns represent how much each group contributed to the overall return. Numbers are always positive despite negative performance in 2022. Guide to the Markets – U.S. Data are as of June 30, 2024.

The S&P 500 is a market-capitalization-weighted index, so these seven mega-cap stocks have a greater proportionate impact on its movement.  As of June 30th, the seven stocks have climbed 37% compared to a 5.1% advance for the S&P 500 Equal Weight Index. 

The chart below shows the outperformance of the Morningstar Market-Cap-Weighted Index vs. the Equal-Weighted Index going back to last year.  You can see that market performance has been driven primarily by a small number of large companies.

Market-Cap-Weighted vs. Equal-Weighted Performance

Smaller company stocks, as measured by the Russell 2000 Index, were down 3.28% for the quarter (+1.73% YTD).  This market sector has been out of favor for years due to higher rates and economic uncertainty.  For the past 3 years, smaller companies have fallen 8% versus a gain of over 33% for the S&P 500 Index. 

Source: Bloomberg

Looking Ahead

The main story for the rest of the year will likely revolve around the Federal Reserve and the timing of changes to lower interest rates.  Interest rates have an impact on the economy and particularly on stock valuations.  

Also, one cannot ignore the AI-centered mega caps and their influence on the market.  The market ought to be sensitive to any potential bad news concerning AI which would most likely impact the market’s overall performance.  While most would agree that AI will have a major impact on our future and how we live, we are still in the early stages of this new technology.  Choosing the winners at this early stage is difficult.  A look back at history shows that the major changes that similarly had a great benefit to society (i.e. the internet, telecom, etc.) are littered with poor individual stock performances that once seemed promising (WorldCom, AOL, etc.).  One must be careful when investing in the latest technology.

Finally, we are hearing some concerns about the November elections. We think the most likely effect will be increased market volatility as it approaches.  If we do encounter price volatility, we hope to take advantage of it as we know the values of the businesses that we own don’t change much in the short term.

This is a contentious political environment as there are strong feelings surrounding both presidential candidates. It appears that many people fear a drastic outcome if their preferred candidate doesn’t win. While we recognize that the winner of the presidential race may matter to most other areas of our lives, we don’t think it matters to your investments. 

History has proven this to be true, and we need to look no further than the recent past which has shown that stocks have performed well under both current leading candidates.  From Trump’s inauguration until before the pandemic escalated the S&P was up 49%.  From Biden’s inauguration until June 28, 2024, the S&P is up an identical 49%.  If you want to be a successful investor over time, you cannot let your emotions – which include your political leanings– affect your investment decision-making. While some policy changes (such as tax rates) do affect business values, most of the value of a business is in the economic value it provides to society and its ability to monetize that value. Elected officials have little impact on this – especially for businesses with wide economic moats. We seek to invest your money in a portfolio of these wide moat companies, and remain focused on their long-term value.

The foregoing content reflects the opinions of Hunt Valley Wealth and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance is not a guarantee of future results.
All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful. Market returns presented above are gross of fees. This report is prepared using third party sources. Hunt Valley Wealth considers these sources to be reliable; however, it cannot guarantee the accuracy or completeness of the information received. Hunt Valley Wealth is a d/b/a of, and investment advisory services are offered through, Connectus Wealth, LLC (“Connectus”). On 06/01/24, Connectus merged with and into The Colony Group. Clients of Connectus assigned their advisory agreements to Colony. The Colony Group, LLC (“Colony”) is an SEC Registered Investment Advisor with offices in Massachusetts, New York, Maryland, Virginia, Florida, Colorado, California, New Hampshire, Connecticut, Washington D.C., and New Jersey. Registration does not imply that the SEC has endorsed or approved the qualifications of Colony or its respective representatives to provide the advisory services described herein. Colony is registered to do business as “The Colony Group of Florida, LLC” in Florida, and “The Colony Group of Missouri, LLC”, in Missouri. Colony provides individuals and institutions with personalized financial advisory services.