Second Quarter 2024 Review and Outlook
Written by Tim Rigby
The markets were mixed in the second quarter. According to The Wall Street Journal, the popular stock indexes posted returns as follows:
Quarter YearThe Dow Jones Average -1.73% 3.80%
The S&P 500 3.92% 14.50%
The NASDAQ Composite 8.26% 18.10%
Many sectors of the economy are doing well and continue to defy predictions of a slowdown or recession. The labor market is strong with unemployment at just 4% of the workforce. This isn’t quite as good as last year but historically very good! Inflation has also been trending lower after spiking up a year or two ago. Federal Reserve policy of sharply raising short term interest rates has slowed this inflation threat so the hope is the Fed will begin to lower interest rates as inflation edges closer to 2%. Lower rates would benefit many sectors of the economy and reduce the risk to banks of having over leveraged borrowers, especially in the commercial and housing sectors.
This has been a “stock pickers” market which means there have been a few companies that have done very well, but quite a few others that have had a very difficult few years. Big stock gains, or big losses, in some cases. Tech stocks dominate those that have done well, while non tech has been much more difficult. The indexes are weighted toward the large technology companies – for example the seven largest holdings in the S&P 500 shown above are tech companies that account for almost 35% of the index. If you look at the same S&P 500 index that is equally weighted, it only shows a 4% return for the year. The same is true for the NASDAQ index with the 10 largest companies accounting for almost 50% of the returns for the year! This dominance by just a handful of very elevated companies has made it difficult to keep risk low while seeking competitive returns. As long-term investors our goal is to invest in reasonably priced companies.
The bond market has shown negative returns the last few years as the Federal Reserve raised interest rates. Now that this policy has slowed inflation, the Fed has indicated their next interest move should be lower. Bond prices move inversely to interest rates, so lower rates make bond values increase and produce positive returns. It has been nice to enjoy money market rates of 5% plus, so these short-term rates could fall somewhat but lower rates overall will be good for the economy and the markets. Now may be the time to invest in bonds or CD’s for the first time in quite a few years.
This is a presidential election year so there may be twists and turns out of Washington that no one foresees which could affect the economy and the markets. Usually an election year is good for returns but this year is in the more highly uncertain category! Both apparent nominees are highly polarizing so guessing which economic policies will prevail is totally unpredictable. In truth, the make up of Congress is probably more important to the economy and the markets but the Presidential Race will probably occupy the headlines for the rest of the year.
Many market strategists are forecasting the second half of 2024 will see one or two interest rate cuts, and better earnings for many companies. That usually is a very good combination to see better stock and bond returns across the board, not just technology companies. With many sectors of the stock market out of favor and underpriced, money could flow out of tech or just into the broader market and produce a robust rally as valuations revert to a more normal average.
Have a great summer and call us if you would like to discuss any aspect of your financial lives.
Tim Rigby