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Second Quarter Commentary 2024—Relative Calm in an Unsettled World

By July 10, 2024No Comments

Since we are conversing with some about concerns over the upcoming election, we start by acknowledging and concurring with the reporting about the unsettling and embarrassing Presidential debate covered by conservative, liberal, national, and international news sources. More interesting is the fact that the stock market did not react much to the event.  It is fair to surmise that both candidates insinuate continued expansionary fiscal policy, whether from additional spending or tax cuts (at a minimum, stopping the return to pre-2018 tax policy scheduled to take effect at the end of 2025).  It is reasonable to argue that monetary and fiscal policy are more relevant to stock price returns than the choice for president.  However, policy ultimately creates and takes away opportunities in some areas of the markets.

As we head into the election, we expect stock market volatility to increase due to increased uncertainty about how policies will change, both through regulation and government support. But first, we have a market with many companies carrying loft valuations as we head into earnings season. Companies that disappoint investors with weaker-than-expected sales and earnings will likely experience sharp sell-offs. The next few weeks may see some pronounced daily market movements.


Overall, returns are positive YTD, but market breadth is weakening.  A few mega-cap stocks in the S&P 500 are driving the index higher without broader participation by the rest of the stock market.  Without broader participation, we will likely have above-average drawdowns (losses) from current levels.

U.S. Market

We have reached the official halfway point of 2024.  Following a solid first quarter, the S&P 500 advanced an additional 4% to lift the YTD return to 15%.  Continuing a trend coming out of the 2022 downturn, most of the return in the S&P 500 continues to come from a small number of very large stocks.  The S&P 500 is cap-weighted, using each stock’s total market value.  The index (essentially) comprises the 500 largest stocks traded in the U.S. market.  The largest companies can dominate movement returns, up or down. The S&P 500 equal-weight index takes the 500 stocks and gives them the same weight—0.20%.  It is rebalanced quarterly.   Some quarterly highlights:

  • The five largest stocks in the S&P 500 represent 60% of the gain YTD.
    • NVIDIA alone represents over 30% of the gain.
  • The S&P 500 equal weight index lost 3.1% last quarter and is up 5% YTD. More stocks went down in value in the second quarter than rose.
  • Small-cap stocks are still trading below their all-time highs reached in 2021. The index is slightly positive YTD.
  • Of the 11 sectors in the S&P 500, only 4 posted a gain.

The chart below illustrates the difference between the ETF returns of the S&P 500 (SPY), the equal-weight S&P 500 (RSP), and Russell index small-cap stocks (IWM) from January 1, 2022.

Semiconductor stocks led by NVIDIA have been on a tear since early 2023 with the surge in AI (artificial intelligence) investing.   The semiconductor index has been among the best-performing subsectors over the past year.  The chart below shows a striking comparison between an insurance index ETF (IAK) and a semiconductor index ETF SOXX.  There are two takeaways:

  • It is important for overall returns to participate in investments when they are trending higher.
  • It may be even more important to avoid them when they are strongly trending lower.

IAK has had about the same return over the last 2.5 years with significantly less risk.

The following table shows the market capitalization of the six largest U.S. stocks versus the GDP of the six largest countries.  Taken alone, it may be difficult to grasp the importance of how large a few tech companies have become.   Warren Buffett used a measure of U.S. total stock market value to GDP.  When the aggregate value of the stock market exceeds GDP, markets are expensive and tend to have lower forward returns.  Six stocks are worth close to the GDP of China.  While this indicator is not particularly useful for constructing portfolios, it is useful in arguing that future returns of the companies currently driving the S&P 500 will be lower.  The current return expectations and growth rates are not sustainable.  Fortunately for us, other investment opportunities will be more attractive.The S&P 500 equal-weight index has outperformed the S&P 500 over long periods of time, but there have been times when this has not been true. Similar to the late 1960s and late 1990s, we are currently experiencing significant S&P 500 outperformance versus the equal-weight index. The Russell 2000 small-cap index referenced above has gone over 950 days without a new high—one of its longest streaks.

International Markets

Political turmoil negatively affected markets in Latin America.  China’s market performance continues to struggle, although tentative signs of economic growth led to positive returns in the quarter. However, the U.S. tariff policy will likely continue negatively affecting investment opportunities.  With the most favorable demographics of major economies, India advanced 8.2% in the quarter and continues to look attractive as an investment opportunity.  Europe stock markets, in aggregate, were flat in the quarter.  Returns continue to lag U.S. markets.  Elections, particularly in France and Great Britain, were surprising and the immediate impact is uncertain.

Fixed Income

The expectations for a rate cut are back on the table as early as September.  Bond returns have turned positive for the year for most types of bonds.  Bond prices fell early in the quarter as inflation came in higher than expected, causing the Federal Reserve to delay the expected rate cuts.  Current competitive short-term rates—money market and CDs yield around 5%.Expected returns are positive relative to inflation.  We expect short-term rates to decline and end up below longer-term rates—representing the normalization of the yield curve.  Bond returns should benefit over the next 6-12 months as interest rates decline.

Investment Process

Our process is adaptable, adjusting to changing market conditions.  If the worst scenarios occur, cash and safer investments become more attractive, and we will reduce equity exposure to avoid potentially larger losses.  Eventually, the market will sell off and there will be portfolio losses from the current high values.  The key to our process is to invest in asset classes, sectors, and sub-sectors through ETFs that have been trending positive and avoiding those that have been trending negative.  It helps maintain positions in many stocks even during price movements that may end up being noise.  Our stock allocation will always lag the S&P 500 when returns are driven by a few stocks but should outperform when those stocks are lagging.  We are available to dive deeper into our process if you are interested.

In the meantime, Whitney, a board member of the National Association of Active Investment Managers (NAAIM), was recently interviewed about our investment approach.  We will post that YouTube interview when it is available.