Author: Veronica Fulton, CFA
Movement in the equity markets for the second quarter of 2024 largely echoed what we saw in the first quarter of the year. The SandP 500 continued its advance, rising 4.28% to new all-time highs. Tech stocks led the market higher, with the NASDAQ 100 up nearly 8%. The major contributors were large-cap growth stocks. The Magnificent 7 and semiconductor companies dominated markets as optimism around demand for AI continued to climb. Across market caps, growth outperformed its value counterpart, as measured by the Russell indices and large cap outperformed mid cap, which outperformed small cap. Although the broader market continued to make new highs, the narrowness of participation has been staggering. We’ve grown more cautious around growth names at the margin. Accordingly, we’ve reduced our overweight in large cap growth across our asset allocation strategies as we anticipate a rotation to areas that have significantly underperformed.
Over the quarter, sentiment remained bullish and valuations stretched – both have bearish implications. However, the accuracy of these indicators can be inconsistent in terms of timing. Hope springs eternal, and market participants can remain excessively optimistic for long periods of time. Another driver of investor optimism, in addition to AI, has been the soft-landing narrative. Federal Reserve Doves have declared victory as the disinflationary trend progresses. In June, headline CPI actually contracted -0.1% from the prior month, adding to a string of improving inflation data throughout the second quarter. Stickier areas started to give way, as we saw inflation slow in both housing rentals and new vehicle prices. We even saw deflation in used car prices. Recently, Fed Chair Powell said Q2 data has given policymakers more confidence that inflation is headed back to their 2% target. Now that inflation has come down, the Fed can look more closely at the other side of their mandate – maximum employment.
We’re seeing signs of normalization in the labor market as the imbalance between demand for workers and supply subsides. Job openings are coming down and quit rates are stabilizing. However, there are cracks – unemployment has been rising. June’s 4.1% unemployment rate is already at the Fed’s December target.
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