2024 2nd Quarter Market Commentary
Top Headline for Q2: Nvidia to the Moon!
The 2nd quarter of 2024 saw continued momentum in large cap technology – driven in large part by Nvidia. Nvidia has become the greatest beneficiary of the “Artificial Intelligence” craze as their stock has soared nearly 150% since the start of the year, lifting it to a whopping $3 trillion market cap. Nvidia is not the only winner of the AI enthusiasm, as the semiconductor industry (as measured by the ETF SMH) rose 15.9% for the quarter.
What’s particularly noteworthy about the current surge in the U.S. equity market is that the gains have been driven by a relatively small number of technology stocks. For example, while the cap-weighted S&P 500 Index was up 3.92% for the quarter, the equal-weighted S&P 500 (i.e., the ETF RSP) was down for the quarter. In fact, more than half of the sectors in the S&P 500 Index were down for the quarter including financials, energy, industrials, real estate, health care, materials and consumer discretionary. The big winner was technology, with XLK rising 8.8%. Another way to highlight the outperformance of mega-cap technology is to compare XLK, which is more heavily weighted towards large technology companies, to its equal-weighted counterpart, RSPT, which evenly distributes all technology companies within the S&P 500. As noted above, XLK was +8.8% for the quarter but RSPT was only up 4.3%.
General Market Update
US Equities: As mentioned above, the S&P 500 Index rose 3.9% during the quarter, the equal-weight S&P 500 (RSP) was down 2.6%, the Nasdaq Composite was up 8.3% and the small company Russell 2000 Index was down 3.3%. The large-cap U.S. equity market finished the 2nd quarter brushing up against all-time highs.
Shockingly, the “Mag 7” stocks (Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, Tesla) further increased their overall percentage of the U.S. equity market, now representing 31% of the cap-weighted S&P 500. We continue to overweight Growth and Technology within portfolios as these types of companies likely stand to benefit more in a lower interest rate environment. We are also keeping a close eye on small cap companies as they could also be a group to benefit when/if interest rates begin to drop.
International and Emerging Market Equities: International equity markets were mixed during the quarter. The Schwab International Equity ETF (SCHF), which holds stocks of developed markets excluding the United States, was down 0.6% and the Schwab Emerging Markets ETF (SCHE) was up 5.3%.
Fixed Income and Credit: After a volatile prior 6 months driven by inflation and growth expectations, the credit markets were quiet in Q2. The stabilizing inflation picture seems to have led to price stability across the yield curve as the 10-year U.S. Treasury yield has settled in around 4.5%. The key area of focus now is on the “short end” of the curve as the U.S. Federal Reserve Bank (the “Fed”) contemplates rate reductions. Whether the Fed’s actions match (or don’t match) market expectations will dictate short to medium-term bond price action over the next 12 months. We certainly favor short to medium term bonds in this environment as we see potential for capital appreciation while earning attractive yields.
Pro-Inflation Investments: Inflation remains an important area of focus. Pro-inflation investments were generally flat for the quarter. While inflation has fallen materially, it is not yet at the Fed’s “target” level of 2%. While the Fed’s rate increases have helped to curtail inflation, continued liberal “fiscal” activity (e.g., large federal budget deficits) are the key reason for inflation hedges in investment portfolios. Gold, as measured by the ETF GLD, followed a strong Q1 with a strong Q2, ending the quarter +4.5%.
A Look Ahead
The overriding themes for the year seem to be (1) when will the Fed begin to lower interest rates and (2) the market reaction to the presidential election cycle. In general, falling rates and “election years” have historically proven to be good for equities. And, thus far in 2024, that has certainly held true as even the expectation of rate drops seems to be buoying the market. We certainly believe the Fed when they say that rate drops are coming, and we’ve seen much improvement on the inflation front. As such, we like stocks in this environment but will be keeping a close eye on seasonality and rebalancing portfolios around opportunities. In average presidential election years there tends to be some volatility in the weeks ahead of the election. We would view that as an opportunity, should it play out this year.
