Clearview Portfolio Consulting June Market Recap
Key Points:
- The S&P500 reached an all-time high in June and is up over 15% in the first half of 2024.
- Artificial intelligence has drawn investor interest with technology stocks pushing the market higher.
- We have witnessed a bear market in diversification over the past few years as large cap US stocks have dominated small caps, international stocks and bonds.
The first half of 2024 was marked by higher than expected inflation, strong corporate earnings and a reduction in the number of expected interest rate cuts by the Federal Reserve. Inflation pressures across the globe have remained elevated. Conflicts in the Ukraine and the Middle East combined with rising tariffs from deglobalization across economies suggest that inflation may remain higher for longer. The US labor market still appears robust but may see signs of softening as initial jobless claims have begun to tick up. Labor mobility has taken a hit as workers with low mortgage rates are reluctant to take jobs in other states. It is estimated that the “lock-in effect” discouraged over 600,000 workers to move to a different zip code in 2023 according to a study by economists at UC Irvine.
Despite the challenges in the housing market, solid corporate earnings and positive revisions to future estimates have pushed stocks higher to start the year. The S&P500 has gained 15.29% in the first 6 months of 2024 in the face of higher interest rates. Investor interest in artificial intelligence (AI) related mega cap stocks have been the catalyst driving valuations higher. The technology sector has gained over 28% so far this year and is the biggest sector in the S&P500, making up almost a third of the index.
The last few years we have witnessed a bear market in diversification as small cap stocks continue to lag large caps. The higher-for-longer expectation in interest rates weighs harder on those companies with the least access to capital and those not yet profitable. The Russell 2000 small cap index is up just 1.73% this year but offers more attractive relative valuations than larger counterparts. International stocks also appear relatively underpriced compared to US stocks as they have underperformed for the past decade amid a strong US Dollar.
The investment grade bond market is slightly negative for the year as Treasury yields have increased across the curve with stickier inflation readings. Credit spreads remain tight as the resilient economy has seen below average default rates. The yield curve remains inverted, with short-dated yields higher than longer ones. Cash investors are enjoying higher yields, but for how long remains uncertain.
Sources: Morningstar Direct, T.Rowe Price, Merrill Lynch, Wall Street Journal