July 2024
Market Update

July 2024

The topic of interest rate cuts continues to dominate the financial markets. Investors are focused on when the Federal Reserve will lower rates, all while keeping a close eye on corporate earnings and valuations. Economists are analyzing inflation and labor market data to determine their impact on the probability and timing of rate cuts. Speeches by Fed members and minutes of recent Fed meetings have received greater scrutiny as we search for clues about the central bank's next steps. Here is a recap of the second quarter and a look ahead to the remainder of 2024!

Analyzing Economic Trends & Surprises From 2Q24

A big theme from the past few years has been the U.S. economy’s strength compared to the rest of the world. Figure 2 shows the Citi Economic Surprise Index, which compares economic data releases against Wall Street’s estimates.

A positive reading indicates economic data is stronger than anticipated (positive surprises), while a negative reading signals more negative surprises. In March 2022, the index turned negative as the Federal Reserve started to raise interest rates. The increase in negative surprises signaled a slowdown in response to early rate hikes. During the past two years, the index stayed mostly positive as the economy remained resilient, with most economic data points surpassing expectations.

In Q2, there was an increase in the number of negative economic surprises as the U.S. economy underperformed expectations. Job growth slowed in April, and the unemployment rate rose to 4% in May. Retail sales declined in April, raising concerns about the U.S. consumer's strength and potential stress for lower-income households. May manufacturing survey data signaled a slowdown, and the U.S. Census Bureau reported the economy grew more slowly in the first quarter than initially estimated.

What do the recent negative surprises indicate? Are they the start of a new trend toward slower economic growth? If so, how much could the economy slow? Markets will closely monitor economic data in the third quarter. However, there isn’t a clear relationship between negative surprises and the rate of economic growth. Instead, the index is more of a reflection of how the economy is performing relative to investor expectations. The more appropriate question may be whether the U.S. economy is returning to its pre-pandemic trend after growing at an above-average rate over the past few years. If so, investors may need to adjust their expectations to match the economy’s new equilibrium.

Investors Remain Intently Focused on the Federal Reserve’s Next Interest Rate Decision

The market remained focused on the Fed’s policy guidance in the second quarter as inflation eased and economic data softened. However, there was no major shift in expectations, and we still expect a rate cut later this year. While the market is closely monitoring the Fed, it’s not receiving much actual guidance. On one hand, members of the Fed have advocated for patience. They want more confirmation that inflation is moving toward the 2% target. At the same time, those members, including Chair Powell, have said there is a high bar for additional rate hikes. Due to the unclear commentary, the market is left to speculate about the Fed’s next step. Investors are using monthly economic data to form their opinions. However, those data points can be noisy from month to month, as they are adjusted to account for seasonal economic effects like summer vacations and holiday shopping.

Market Recap

Source: YCharts, 5/31/2024– 6/30/2024, Total Return Data using SPY, DIA, IJH, IWM, QQQ, EFA, VWO, AGG, and JNK. 2024 returns as of 12/31/2023.

The stock market experienced ups and downs this quarter. In April, stocks traded lower, reversing some of the earlier gains from Q1. In May, stocks rebounded, and the S&P 500 finished the quarter by setting multiple new all-time highs.

One notable theme in the stock market this year has been the outperformance of the largest companies. The S&P 500 Index gained +4.4% in Q2, increasing its 2024 return to more than +15%. In contrast, the Russell 2000 Index of small cap companies fell by -3.3%, lowering its 2024 return to +1.6%.

International stocks underperformed U.S. stocks in Q2, but performance was mixed. The MSCI Emerging Market Index gained +4.4%, comparable to the S&P 500’s return. However, the MSCI EAFE Index of developed market stocks returned -0.2%. The two main international stock market indices have underperformed U.S. stocks by almost -10% this year, despite mid-single-digit gains. The difference in returns continues to be a lack of exposure to companies in the artificial intelligence industry outside the U.S.

Our intermediate and longer-term indicators still advise staying invested in equities. However, our equity models have prompted us to make minor adjustments. Our primary focus remains on U.S. Large Cap with a growth bias. We temporarily stepped into Mid Cap and international but moved back into Large Cap with a growth focus in June. We will continue to closely monitor the trends for additional opportunities.

One theme supporting bonds is their relatively high-income level compared to the past fifteen years. As you can see in your bond allocation, the yields are substantially higher than three years ago! In June, we stayed fully invested. We are still focused on managing interest rate risk and are overweighted to Floating Rate Bank loans, favoring their lower interest rate sensitivity and appealing yields.

Third Quarter Outlook – Themes to Watch

The stock market is off to a strong start this year, with the S&P 500 gaining over +15%. Economic data has softened, raising the question of whether the economy is slowing or simply returning to normal. Investors started this year expecting the Federal Reserve to cut interest rates in March; however, they are still waiting for the first interest rate cut.

The second half of 2024 will be busy. We expect the Federal Reserve to start cutting interest rates before year-end, but the projected timing of the first rate cut remains uncertain. The second-quarter earnings season starts in mid-July, which will provide an opportunity to hear updated commentaries from companies. There is a renewed focus on economic data and the economy’s trajectory, and the presidential election will take place in November. We will continue to monitor financial markets and the economy, provide timely updates, and adjust portfolios as needed. As always, if you are concerned about your risk level, please reach out to us, and schedule a time to review your allocation and financial plan.

Client Appreciation Event – Save the date!

We plan on hosting another Client Appreciation Event at Real Salt Lake Stadium in the evening on Saturday, August 24th. For now, just save the date and expect to receive more information about tickets in the coming months!

If you have any questions, please do not hesitate to contact our office at 480-348-2100.

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