Investment Outlook: Second Quarter 2024 Market Recap
We are halfway through 2024 and the equity markets have continued to march higher. While the second quarter was not as strong as the first, the stock market has proven to be resilient. In many ways the second quarter was an echo of the first with inflation, artificial intelligence, and the election top of mind to both Wall Street and Main Street.
Inflation has remained stubborn but has recently shown signs of moving in the right direction. The change in the May Consumer Price Index (CPI) was the lowest it has been in two years. Inflation remains elevated compared to the Federal Reserve target rate of 2%, driven primarily by housing costs, health care, and insurance.
Due to persistent inflation, the Federal Reserve has been hesitant to cut interest rates. Despite the Fed's slower-than-expected pace, investors still believe that it will begin to reduce rates later this year. A rate cut will be a welcome relief for all types of borrowers, including home buyers, corporations, and the government itself. The cost of debt for the United States government is climbing, as treasuries with low interest rates mature and new treasuries are issued with significantly higher rates.
For most of the quarter, large stocks with exposure to artificial intelligence continued to lead the equity market higher. At one point, Nvidia briefly became the largest company in the world before retreating slightly into the end of the quarter. The concentration risk in the equity market has never been higher, with the top ten companies in the S&P 500 accounting for more than a third of the overall market capitalization. When so few companies make up such a large portion of the overall market, it can lead to significant increases in volatility. When these large companies perform well, it benefits investors because the oversized weightings amplify overall market returns. Conversely, if these large companies stumble, the negative returns will also be amplified.
Towards the end of June, signs emerged that the rest of the market was beginning to catch up to the handful of AI-related stocks leading the rally. A widening of market breadth, which refers to the number of companies participating in a market trend, would be a welcome next step. This would indicate that a broad spectrum of our economy is flourishing, not just one small segment.
Economic risks abound in today’s world, but there remains a path to avoid these risks and enable the US economy to flourish.
"Written in June 2024 for 2Q2024 Investment Outlook"
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