June 2024 Market Perspective
After a particularly steep selloff in equities during the month of April, May was a strong month for the three major equity indices. The Nasdaq led the major indices by gaining 6.98%. The S&P 500 and the Dow rose 4.96% and 2.58%, respectively. Ten of the eleven S&P 500 sectors finished the month higher, with energy being the only laggard due to falling oil prices. The narrow market rally that has been fueled by the Magnificent Seven has narrowed even further – more than half of May’s S&P 500 gains can be attributed to four mega tech stocks.
Gross Domestic Product (GDP), a broad measure of goods and services produced in the U.S., slowed in the first quarter of 2024. After finishing 2023 with a reading of 3.4% for the 4th quarter, May’s second estimate (of three) saw a downward revision of the advance estimate from 1.6% to 1.3%. One of the Federal Reserve’s (Fed) goals in fighting inflation was to slow GDP growth without the economy falling to a recession. Thus far, they have been able to accomplish this goal and the possibility of a “soft landing” is becoming more feasible.
Both stocks and bonds fared well in May, supported by strong corporate earnings and renewed hopes that the Fed will begin cutting rates sooner than later. Although Fed chair Jay Powell stated that there has been “a lack of progress” on bringing inflation down, he suggested that interest rate increases were unlikely. With the potential for rate hikes off the table, for now, investors were bullish, leading to positive gains across the stock market.
Due to renewed hope of Fed rate cuts coming sooner than expected, the bond market rallied as well in May. After being battered throughout 2024 by fears that Fed rate cuts would be prolonged to later in this year or even next year, the Bloomberg U.S. Aggregate index (Agg) gained 1.70% in May. However, due to rate cut uncertainty and Treasury yields, the Agg is still negative for year.
May’s CPI report saw a marked decline in month-over-month inflation. Coming off of April’s 0.3% gain, inflation was unchanged in May (0.0%), and over the last 12 months the all items index increased 3.3%. Core inflation, excluding volatile food and energy prices, rose 0.3% for the month and 3.4% over the past 12 months.
Our Takeaway
The focus of investors and the market continues to be the Fed and their path to interest rate cuts. Although the latest CPI reading gives investors renewed hope, Jay Powell has indicated that the Fed will need to see sustained progress on inflation (i.e., several months of month-over-month deceleration) before they will cut rates. Between now and when the Fed cuts rates we expect volatility in both the stock and bond markets, particularly in bonds. Conservative investors (those with bond-heavy portfolios) have been and will continue to be affected by the negative bond environment.
After the release of the May CPI report, CME FedWatch Tool is estimating a rate pause (no increase) for the June and July Fed Meeting and an approximately 73% probability of a rate cut at the September meeting.
We expect to see continued volatility in the equity and bond markets due to fears of rate cuts being prolonged. Also, with the upcoming presidential election, we expect the market to experience some volatility due to uncertainty with the outcome and investor’s feelings on the effects of either candidate’s policy plans for the economy.
We have recently made some changes to the portfolios to reflect our thoughts on not only the current economic landscape, but where we and our research partners feel the market is headed. As a higher interest rate environment continues to drag on small and mid-capitalization (cap) stocks, we have not only maintained but increased a tilt to large-cap and have maintained a focus on growth over value. Due to domestic equities continuing their dominance over their foreign counterparts, we have trimmed some of our international allocation and added that to our domestic holdings.
All indices are unmanaged, and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance does not guarantee future results.
