HCM Quarterly Review Q2 2024
The second quarter produced a more mixed performance across various markets than the strong return in the S&P 500 might imply, as AI-driven tech-stock enthusiasm again powered the Nasdaq and S&P 500 higher while other major indices lagged. The Nasdaq was, by far, the best performing major index in the second quarter while the S&P 500, where tech is the largest sector weighting, also logged a solidly positive gain. Less tech focused indices didn’t fare as well, however, as the Dow Jones Industrial Average and small-cap focused Russell 2000 posted negative quarterly returns.
By market capitalization, large caps outperformed small caps in Q2, as they did in the first quarter of 2024. Initially, higher Treasury yields in April weighed on small-caps, while late in the second quarter economic growth concerns pressured the Russell 2000.
From an investment style standpoint, growth massively outperformed value in the second quarter, as tech-heavy growth funds once again benefited from continued 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 11 S&P 500 sectors finished the second quarter with positive returns. 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 NVDA, ORCL, AVGO, TSM, MSFT, AMZN and others as AI enthusiasm continued to push the broad tech sector and S&P 500 higher. Utilities 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 the quarter 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.
Switching to fixed income markets, the Bloomberg Barclays U.S. 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 in the second quarter, 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 only a slight decline in Q2. 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.
April
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 S&P 500 pulled back and closed below its 50-day moving average, indicating a structural breakdown. Investors de-risked and moved money to cash and/or short-term bonds. Did this change our view of the S&P 500 closing above 5500 this year? No, we still anticipated stocks moving higher.
Seasoned traders also looked for what is called a 50% retracement, and we have added a chart of the S&P 500 where you can see that it got very close to that level. The markets were deeply oversold on a short-term basis, so we expected there would probably be a few up-days followed by additional selling pressure before the market found a place of support.
The HCM Pivot Point® signaled a sell on the very modest pullback we had in April. We reduced exposure to equities by about $1.1 billion, which was then put back on when the HCM Pivot Point® turned back up. All the money we took off was reinvested at a lower price. We’re coming to the conclusion that the HCM Pivot Point® trading system might be the best system we have built. Even with the very shallow pullback it did its job very well in our opinion.
May
The S&P 500 broke out above its late March high, and we expected a minor pullback. We see the market moving higher throughout the year and we think it could surprise everyone with just how much strength it has – possibly even pushing up to the 5600-5700 level. The old trader’s saying is “sell in May and go away”, but that does not look like the case this year. Maybe we will have to update the saying to “buy in May and stay.”
The markets did sell off a bit to close out May. In our opinion, this should have been seen as an opportunity to buy or add to your positions. The HCM-BuyLine® is strong, and the trend is clearly up, so all pullbacks should be considered buyable at this point.
June
The 20-year Treasuries are in a clear downtrend, but any news that inflation might be softening will move bonds higher, and probably at a fast pace. Look how TLT is starting to make a short-term higher low. It’s early, but everyone should be watching the bond market, as it will probably tell us a lot about where inflation is headed.
The markets made a very nice jump up mid-June. CPI and PPI came in at levels that suggest a slowing economy. The Fed will need to be awake at the wheel so as not to throw us into a recession.
We have been positioned well with the current run up. Commodities, or hard assets, were leading the way early this year, but that has switched as hard assets are slowing, and tech and growth stocks are now taking the lead.
Following a softer-than-expected May CPI inflation report, producer price inflation also surprised to the downside. It provides a reprieve from faster price growth in the first few months of this year and suggests that PCE inflation, which is the Fed’s target, will also likely ease. Continued moderation in inflation creates room for a Fed rate cut later this year.
Is the market overbought? Yes, but the uptrend is still intact. Is a pullback warranted? Yes, and we will probably have a modest selloff soon. However, we do think it will be a buyable pullback as the bull market is still very much alive. Nvidia (NVDA) is all you hear about, which is justifiable, but as Nvidia sold off it looks like the money is going into other areas of the market, which is very bullish. Inflation is dropping and earnings have been very good. There is over 6 trillion in cash on the sidelines, and even with the market moving higher that amount has hardly changed, so there is still lots of buying power to fuel the markets higher.
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