Q2 2024 Market Snapshot
Highlights of Q2 2024
The S&P 500 experienced its first real dose of volatility early in the second quarter, but expectations for interest rate cuts by the Federal Reserve, solid economic growth and continued strong financial performance from AI-related tech companies ultimately pushed the S&P 500 to new all-time highs and the index finished the quarter with strong 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 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 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 1 FOMC decision, Fed 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) rose 3.4% year over year, slightly lower than the 3.5% in March and that resumption of disinflation further increased expectations for rate cuts in 2024.
The upward momentum continued in June thanks to more positive news on inflation, additional reassuring commentary from the Fed and strong AI-linked tech earnings. First, the May CPI (released in mid-June) declined to 3.3% year over year, the lowest level since February. Core CPI, which excludes food and energy prices, dropped to the lowest level since April 2021, further confirming ongoing disinflation. Then, at the June FOMC meeting, Fed Chair Powell reassured markets two rate cuts are entirely possible in 2024, reinforcing market expectations for a September rate cut. Economic data, meanwhile, showed continued moderation of activity and that slowing growth and falling inflation helped to push the 10-year Treasury yield close to 4.20%, a multi-month low. Finally, investor excitement for AI remained extreme in June, as strong AI-driven earnings from Oracle (ORCL) and Broadcom (AVGO) along with news 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 to new all-time highs above 5,500.
In sum, markets impressively rebounded from April declines and the S&P 500 hit a new high thanks to increased rate cut expectations, falling Treasury yields and continued robust earnings growth from AI-linked tech companies.
Debriefing Q2 2024
US Equities
The U.S. equity market continued its steady climb from the last quarter, gaining over 5%. The rally was largely led by the Information Technology sector, followed by Communication Services and Utilities. The major drag on the performance was from Materials, followed by Industrials and Energy.
Companies exposed to artificial intelligence continued to outperform other areas of the market, and a strong earnings season for U.S. tech companies meant global growth stocks were once again the top performing asset class
Among financials, numerous U.S. banks announced plans to increase dividends after passing annual stress tests from the Federal Reserve. The likely timing and extent of interest rates cuts remained a key focus for markets in the quarter. There were worries at the start of the quarter that the U.S. economy may be overheating, and strong economic data was greeted negatively by the market. However, hopes of a soft landing for the economy grew as the quarter progressed.
The Bond Market
While the 2nd quarter return was relatively subdued, the intra-quarter volatility is definitely something to write about. The returns for each month were indicative of the choppiness seen in the market. Much of the volatility has been an indication of the market trying to gauge what the Fed’s next step will be.
Moderate signs of easing inflation provide hope for an early cut in rates. While the consensus is that the path of the Fed Funds Rate will be downward, the amount of 2024 rate cuts expected by the market has vacillated between one and two.
Treasury rates were up slightly across the curve, with the 2-year Treasury up 9 bps, the 10-Year up 8 bps and 30-year also up 8 bps. However, most of this movement can be traced back to April and, since that point, Treasury rates have consistently trended downwards.
Corporate bonds, which have been trading at historic tight levels in recent quarters, started to show some weakness towards the end of the quarter. The fundamentals on corporate bonds remain strong but with persistent inflows and tightening spreads, the asset class has become a bit overvalued which has led to a subsequent sell-off.
Jobs and Consumer Confidence
In the U.S., the unemployment rate hit 4.1% in June, the highest since November 2021. In June, 206,000 jobs were added to the non-farm payroll, compared to a downwardly revised 218,000 in May and forecasts of 190,000. The average monthly payroll growth for this year has been 222,000, compared to 251,000 in 2023 and 377,000 in 2022.
U.S. Consumer Confidence dipped to 100.4 in June, down from 101.3 in May. Consumers expressed mixed feelings about the present situation. There was an uptick in sentiment about the current labor market, but their assessment of current business conditions has declined. Consumer expectations for both future income and business conditions weakened, weighing down the overall sentiment.
The Dollar Index and Commodities
The U.S. Dollar Index (DXY) had another topsy-turvy quarter, facing its first monthly decline in 2024 in May. The volatility in the currency’s strength helped the earning of many technology companies, but it affected the country’s exports.
Commodities saw marginal gains during the second quarter of 2024. Industrial metals and precious metals were the strongest gainers, while agriculture was the weakest performer. Within agriculture, a significant price gain for coffee failed to offset weaker prices for cotton, corn, cocoa, and sugar. As economic surprises have increased and consumer confidence stabilized, commodities such as copper, which is seen as a leading indicator of the global economy’s health, rose during the quarter. Gold saw a surge as well, while WTI crude oil saw a modest increase due to OPEC+ production restrictions and increased geopolitical risk in the Middle East.
Looking Ahead
As the bull market continued during the second quarter of 2024, equities continue to present an interesting investing opportunity for us. The continued strength of the U.S. economy is very encouraging, which has been underpinned by a strong labor market that continues to create jobs, in turn is supporting consumer spending, particularly in services. While a contraction in manufacturing and rising unemployment are proof of the lagged impact of rate hikes, the U.S. economy is likely to avoid a recession. The substantial corporate earnings and a soft landing for the economy in the second half of 2024 is a likely scenario. Currently, the market has priced in one rate cut by the Fed in 2024.
The markets will also benefit from the stellar earnings growth, especially in the technology sector. The S&P 500 has seen earnings growth in the past three quarters, with growth expected to improve throughout 2024.
Overall, the broadening equity market, the continued resilient economy, and the promising secular innovative trends which includes generative AI, health and wellness, and reshoring are all positive signs. Markets are positioned well for the balance of the year, though some volatility may be expected along the way, particularly given that 2024 is an election year.
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