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As we reach the midpoint of 2024, not only is it time to transition our attention from the College World Series to the gridiron, but it is also time to pause and reflect on the recent market environment, and re-commit to our game plan for the second half and beyond. Just as coach Rhule and his staff use halftime to review their first half performance and prepare to dominate the second half, below we will engage in a similar process, delving into the key events that shaped the first half of the year and anticipate what might influence the markets in the second half.
Stock Market Performance: Offensive Line and Earnings
Market performance in the first half was reminiscent of a long touchdown drive, led by the offensive line and a running back who is able to gain positive yardage carry after carry, consistently moving the chains. Equity markets had a similar feel to its drive in the first half of 2024. The S&P 500 index has moved higher in consistent fashion so far this year and the index has already seen 31 new all-time highs in 2024. Within the markets, we continue to see the growth investment style outperform its value peers. Growth outperformance has been a consistent trend in US markets over the past few years and the SCP portfolios have benefited from their overweight allocations to the outperforming segment of markets. The NASDAQ 100 Index, heavily weighted with growth-oriented tech giants and the often mentioned ‘Magnificent seven’, is having a great year thus far, outperforming value- and core- investment styles thus far in 2024, building off similar outperformance in 2023 as well.
Just as a good running back needs a strong, physical offensive line to have success; equities need strong earnings growth to drive their long-term success. Earnings have continued to drive broad market gains through the first half of the year. According to Factset, 2Q24 corporate earnings are expected to report 9% year-over-year earnings growth, the highest growth rate for the index since 1Q22. There is also reason for optimism on the earnings, giving us reason to believe that this is not a one-drive phenomena, but a game winning strategy. Looking ahead, analysts are expecting earnings growth to continue at 8.2% and 17.6% for the 3rd and 4th quarters respectively.
As any seasoned football fan knows, momentum can shift rapidly, and we will continue to monitor drivers of stock market performance for any potential shifts worthy of a reaction.
Fixed Income Market: Expectations Matter Navigating Interest Rate Volatility
Just as any good football fan, or investor, knows expectations can have a very big impact on one’s actual experience. This was certainly the case for fixed income investors in the first half of the year. As you may recall, coming into the year most forecasters were anticipating a rapid fall in inflation, which would allow for aggressive rate cuts. Well, as the year, or season, moves along we often need to react to new information and perhaps adjust expectations or the game plan.
To that end, the Federal Reserve's actions were a focal point for fixed income investors. Coming into the year, the market was pricing in repeated Fed rate cuts in 2024, yet the Fed continues to push back the timing of its first rate cut and the market has adjusted market pricing to reflect a higher for longer rate environment going forward.
The 10-year Treasury yield, a key benchmark, rose from 3.50% at the start of the year to 4.39% by the end of June. This rapid increase was driven by the aforementioned change in rate expectations and the resulting market re-pricing. This activity has clearly put some pressure on bond prices, however, higher market yields than originally expected have presented opportunities for many income focused investors.
Looking Ahead: Second Half of 2024
The first half of the year is a good reminder that while a solid game plan is critical to success, it is not always enough. Markets and football games can be unpredictable, and they are certainly dynamic. The key to long-term success is staying focused on the long-term goals, while at the same time preparing for an unpredictable future. It is also wise to continuously review the on-field plays that are unfolding and make and adjustments to increase our chances of success.
As we look ahead to the second half of 2024, there are several key areas that are expected to play pivotal roles in shaping market dynamics.
1. Federal Reserve Policy : The Fed's trajectory on interest rates will continue to be a major driver. The markets are currently expecting between one and two rate hikes for the remainder of the year. We will be keenly focused on signals from the Federal Open Market Committee (FOMC) meetings, akin to how a quarterback reads the defense before a play. Any indications of rate cuts could boost investor sentiment and provide investment opportunities.
2. Corporate Earnings: Earnings reports in the coming quarters will be scrutinized for signs of economic resilience or slowdown. Companies' abilities to navigate higher costs and maintain profit margins will be critical. The variance between earnings and revenues will be very interesting to watch as earnings are announced in the coming months to assess the impact of both the economy and management decisions.
3. Elections: You have likely heard that this year is an election year. There is an argument to be made that 2024 is THE election year. Globally, more voters than ever before in history will engage in national elections and that may provide investors with opportunities. We recently finished the earliest US presidential debate and can certainly expect more noise around the election as we get closer to November. However, it is important to reflect on what Elections have historically meant for markets overall (not much).
- The most important thing is to remember the impact of Exhibit A. Over a century of data shows that the US stock market trends upward regardless of who wins the US Presidential election. Investors cannot allow increased media attention to overly influence decision making.
- While we do not want to fight the trend of markets, we do want to continuously search for investment opportunities. Elections have consequences as we know. The impact of consequences are often increased uncertainty levels. Finally, with uncertainty comes opportunity. 49% of the global population having their votes heard suggest the second half of the year will provide ample investment opportunities to consider.
- The second most important thing to remember about elections is their historically has had an extremely poor noise to signal ratio; there is just so much more noise than anything useful on the campaign trail. Knowing this, we remain focused on prudent investment decisions and not letting the election noise overly impact portfolio positions, just as the Huskers work to keep any off-field distractions from affect team performance.
As we move into the second half, staying informed and adaptable will be crucial. We are at, or near, all-time highs in many equity markets, which may or may not continue to finish the year. The Fed’s data dependent approach to monetary policy means there could be even more interest volatility ahead as markets anticipate their next potential move.
The good news is that there are many reasons for optimism as well. Game plans do exist. All portfolios built at SCP are driven by a client’s financial plan, where the focus will always remain. We have been executing well on portfolio management construction and decision making throughout the current environment. We work tirelessly to continue building upon that success for you.
Please do not hesitate to reach out to us with any questions. I hope you had a wonderful 4th of the July Celebration!
Best,
David
