2nd Quarter 2024 Market Commentary
The S&P 500 had yet another nice quarter this year. After rising 10.56% during the first quarter, it rose another 4.28% during the second quarter for a total of 15.29% for the first six months of the year. That is excellent performance. I written last quarter that I expected a bit of a pullback, and we did get one in April, but a somewhat small and temporary one.
I wrote last quarter about how the market performance was very narrow, with the so-called Magnificent 7 stocks driving the market higher and everything else trailing behind. That has continued and if anything, the S&P 500 has narrowed further. The following chart (thank you to Apollo Asset Management) illustrates this perfectly:
When you take the top 7 stocks out of the S&P500, the rest have gone up a little bit this year, but not that much. Is this bad? Not if you owned the S&P500 for the past 6 months. But if you owned a more diversified portfolio, your performance, while still good, is a bit more muted. The S&P Equal Weight Total Return index, which has each stock in the index an equal weight instead of the market weighting for the S&P500, rose 5.08% for the first 6 months. The MSCI EAFE Index went up 5.34%. That is an index of non-US developed countries, mainly Europe, Japan, Canada, and Australia. For the second quarter alone, both those indices went down slightly.
Can this trend continue? Yes, of course it can, but the longer it goes on, the greater the risk that bad news will cause a significant fall in the narrow S&P500. If that happens, you might be happy that you own some other stocks. They might go down as well, but they don’t have as far to fall and assuming earnings hold up, any downturn might be quite temporary.
In fact, earnings forecasts are still very robust. According to JP Morgan’s latest Guide to the Markets, the forecast for Q2 earnings growth of the Magnificent 7 is a 28% increase with only a 4% increase for earnings for everything else. But by the fourth quarter, earnings growth of both the Mag 7 and the rest of the S&P500 is forecast to be 17%. This is still pretty good and along with benign inflation numbers could keep the stock market from anything but a mild pullback.
Speaking of inflation, core CPI (excluding food and energy) was still rising 3.3% in May. It may moderate further for June, but that is still above the Fed’s 2% target and despite the softening labor market, will probably keep the Fed from their first rate cut until after the election. This is where forecasts start to differ. Several economists I follow are still calling for two rate cuts this year with the first one in September. But the economic forecasting group that I most trust is forecasting that the economy will firm as we go into the fall which will keep inflation from dropping further. They feel that rate cuts are not imminent. This will keep the yield on cash (like your high-yield savings account) at around 5%. It might mean that the 10-year treasury bond yield will still rise a little further. At Cereus Financial, we have been keeping duration lower in our bond allocations and we will continue to do that for the moment. Since short-term rates are higher than long-term rates, this increases the income you receive on your bonds.
US stocks are very expensive with an S&P500 forward Price-Earnings ratio (based on forecasted earnings) of 21.01 as of June 20, 2024 (From JP Morgan). The 20-year average PE ratio for the S&P 500 is 15.7. Meanwhile, the PE ratio for the MSCI All-Country EX-US index (a broad international stock index) is 13.5 and the 20-year average is 13. The US stock market is expensive when you compare it internationally. Meanwhile, the European Central Bank as well as some other central banks have started cutting rates ahead of the US. This could mean better international performance to come and with the US market so expensive, it’s important to be diversified with international stocks. The expensive US market might stay expensive, but there are a lot of reasons to believe that international markets could outperform moving forward.
Last quarter, I expected a pullback. Although we got it, we still have great S&P 500 performance year-to-date. Again, I expect some pullback before the end of the year in those magnificent 7 stocks which will affect the S&P500 more than other indices. You lower risk by holding a diversified portfolio and that’s truer today than ever. Your objective should be to meet your financial goals while lowering risk as much as possible. That means a broadly diversified stock allocation, a bond allocation because of bond’s lower volatility (even after the terrible 2022), and some alternative investments that have lower correlations to both stocks and bonds. I have recently written an informative blog post on alternative investments. You can find part 1 here: https://cereusfinancial.com/2024/07/08/alternative-investments-and-your-portfolio-part-1-why-are-alternatives-important/.
As always, I would love to hear your comments or questions. Feel free to reach out to me or Mike Dunne. If we are not managing your investments, we would be happy to chat with you about doing so. Check out our website at www.cereusfinancial.com for disclosures and more information including other blog articles.
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