Market Commentary - June 2024

Monthly Update

The S&P 500 continued to power on in June, but the broad market participation began to lag again as big tech stocks mostly drove the bus again. The tech heavy S&P 500 rose 3.5% and the even tech heavier NASDAQ rallied by 6% but the Russell 2000, capturing small cap stocks, fell 1.1% and the mid cap index was down by 1.8%[1]. Also, reflecting the mixed picture was the performance of international markets. The Japanese Nikkei 225 continued its strong year, rising by almost 3% in June, bringing its year-to-date rally to almost 20% in yen terms[2]. The STOXX 600 in Europe in contrast fell 1.3% in the month and the Hang Seng was lower by 2%[3].

It's almost impossible to talk about ‘the stock market’ without mentioning AI, and specifically Nvidia. They of course have been the direct beneficiary of the capital spending as its customers invest enormous amounts of money to build out large language models and the necessary computing power. Year to date through June, Nvidia’s stock rose 150% after a gain of 239% in 2023[4]. For a moment, it did have the biggest market cap in the world.

The interest rate picture was influenced by a very mixed situation with the economic data, both in the US and globally. After rising by 1.3% in Q1, US GDP growth is now estimated to grow by 1.7% according to the last read by the Atlanta Fed’s GDPNow forecast[5]. Based on all the earnings calls and economic data that I parse each day, it does feel more like a 1.5% type economy rather than 3%. Let’s go through the plusses and minuses to highlight the uneven economic landscape.

As heard from a variety of retailers in their earnings calls over the past few months, lower to middle income consumers seem to be very price conscious and value seeking with their spending. They are focused more on needs than wants as the cumulative impact of inflation over the past few years has taken its toll relative to wage growth. Also, as many spent mostly on goods rather than services during Covid, we’ve seen a switch from goods and back to services, particularly on travel, leisure, and hospitality. The Walmart CFO, to use this huge retailer as an example, has referred to the US consumer for multiple quarters now as being ‘choiceful.’ On the other hand, the higher income consumer is feeling better about things as many are benefiting from higher stock prices and around a 5% interest rate on their savings, via Treasuries, CDs or other fixed income.

Within housing, the pace of turnover of existing homes hovers around 30-year lows but the rate of new residential housing construction is doing better as the housing market needs more supply[6]. And even with the builder market, big builders are surviving much better than smaller ones who are more stretched with the higher cost of capital and have less ability to discount their homes and/or buydown mortgages that large builders can more easily do.

US manufacturing as measured by the ISM monthly report has been contracting for almost two years. Part of the reason was stated above as consumers have shifted their spending to services and less on stuff. Also, many are still trying to right size their inventory levels. Manufacturing around the world is challenged too by the same dynamics. Also, global trade is somewhat muted as is capital spending in the US as seen with the durable goods order data. The bright spot of the US economy in addition to the spending on services, mostly from higher income spenders, comes from government spending as it’s been enormous as seen with a budget deficit as a percent of GDP around 6% which is usually a level seen around recessions and not expansions with a 4% unemployment rate[7].

With respect to inflation and what this also means for monetary policy, the trajectory is still down but the slowdown in the rate of increases has been glacial of late. Seen in June, the May CPI figure rose 3.3% y/o/y vs 3.4% seen in April, 3.5% in March and 3.2% in February[8]. Slicing this data up, goods prices have fallen back to their pre-Covid pace of zero change, but service inflation has been more persistent. The other inflation statistic that the Fed has chosen as their preferred measure, though I disagree with their choice, is the PCE (personal consumption expenditure) inflation number. That for May was up 2.6% y/o/y[9]. The difference between CPI and PCE is mostly due to the methodology in calculating healthcare prices and the weighting of it and housing remains quite different in each figure.

So, what does this all mean for monetary policy which we know is a major influence on stocks and bonds? The European Central Bank in June trimmed its deposit rate by 25 basis points to 3.75% in a move that was well telegraphed but gave very little guidance on when another cut may follow[10]. The Swiss National Bank surprised markets with a second rate cut post their hikes. On the other hand, the Federal Reserve and Bank of England held steady with rates as did the Bank of Canada, after their prior rate cut, and the Reserve Bank of Australia. Separately from them all, the Bank of Japan is still searching for the right moment to raise interest rates again and trim their quantitative easing program. With the Japanese yen continuing to weaken and inflation running above the rate of wage growth, it does seem that the BoJ will be tightening monetary policy again at their next meeting in late July.

Specifically with the Fed, I do believe they will end up cutting interest rates in September as they shift some of their inflation focus to the recent rise in the unemployment rate. While 4% is historically very low, it is at a 2 ½ year high. Maybe they will add another one in December if the current economic trends continue.

Conclusion

As mixed and uneven the US economy is, it also is reflected in a very mixed and uneven stock market as discussed. For every pro there is a con, for every AI driven stock, there is a company dealing with lackluster sales growth. This continued and growing divergence is not something I believe can just continue on for too long because many of the big tech stocks that are doing so well rely on the business of small and medium sized companies as customers. We of course hope the smaller stocks catch up to the bigger ones rather than the other way around.

In the investment and forecasting business, that is most impacted by what comes next rather than what has already occurred, it’s why we’re always humble about what we do but diligent when it comes to investing client money in terms of constantly gauging the risk and reward and taking a long-term time horizon perspective. That allows us to ignore much of the short-term noise and focus most on the bigger picture. I say this all because it now seems like we’re in an even more uncertain time with so many cross currents to juggle.

We acknowledge that we live in a different macro world than enjoyed in the 15 years pre Covid and the resumption of easy money that took place to economically get us out of the self-imposed shutdowns. While the interest rate levels currently seen could be construed as ‘normal’, there is still an adjustment period to them because the past few decades saw interest rates as ‘abnormal.’ There is an ongoing debate within the Fed as to what is restrictive monetary policy and what is not. The answer is not it is, or it isn’t. It is for those that have debt coming due this year or next, or have a big ticket item to buy. It isn’t for those receiving interest income and enjoying the higher stock market.

Whatever comes our way though in this very tricky investing landscape, it remains vital that investors have adequate short-term liquidity over the next 2-3 years. Knowing that period is covered can help separate the balance of one’s portfolio from the ups and downs of the markets. Time horizon is always crucial and is always the best friend of any investor. We are not just in the asset management business but also in the risk management business and always believe that by watching our back and focusing on the risks, the upside should take care of itself.

Disclaimer

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The market and economic data is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The information in this report has been prepared from data believed to be reliable, but no representation is being made as to its accuracy and completeness.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.

The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.

The Stoxx Europe 600 index also called the STOXX 600 is an indicator of the performance of the European stock market. It measures the performance of large mid and small-cap companies across 17 countries in Europe. The number of constituents is fixed at 600.

The Hang Seng Index is a freefloat-adjusted market-capitalization-weighted stock-market index in Hong Kong. It is used to record and monitor daily changes of the largest companies of the Hong Kong stock market and is the main indicator of the overall market performance in Hong Kong. These 82 constituent companies represent about 58% of the capitalization of the Hong Kong Stock Exchange.

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The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

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[1] Bloomberg

[2] Bloomberg

[3] Bloomberg

[4] Bloomberg

[5] Federal Reserve Bank of Atlanta

[6] Bloomberg

[7] Bloomberg

[8] Bloomberg

[9] Bloomberg

[10] Bloomberg