First half 2024 market performance

As the second quarter came to a close, we wanted to review the performance of markets for the first half of 2024. The S&P 500, which is a widely used US stock market benchmark was up 14.5% for the year through the first two quarters. The tech-heavy NASDAQ was up just under 17%, while the small-cap Russell 2000 was up a little over 1%, and the Dow Jones Industrial Average was up under 4%. The broader MSCI All World index was up 11.4% Bonds, as measured by the AGG (iShares Core US Aggegate Bond ETF) was down slightly on the year. Notably, Gold was up 12.5% for the year, even as the US dollar strengthened versus a basket of other currencies.

• The US stock market performance was overwhelmingly driven by technology companies, specifically semiconductor stocks
• The SMH (Semiconductor ETF) was up just short of 50% for the year
• No other sub-sector came close to matching the overall S&P 500 return, with Materials, Industrials, Healthcare, Financials, and Utilities posting returns between 4-10%
• Historically, when the stock market posts a strong 1H, the second half continues to be strong
• Also, historically, the market does well in election years
• However, a thinly led market is not a healthy market, and this presidential election is shaping up to be anything but typical
• The gold action is very notable, particularly given the strength of the US dollar
• Gold may be sniffing out future weakness in the dollar and/or a re-emergence of inflation

US economic data points to weakening economy

Despite the July 4th holiday, we received significant economic data this week.  The main focus for the Fed and the markets has been the state of the labor market, which has been remarkably resilient in the face of higher interest rates.  This week's data showed that the job market seems to be weakening, with non-farm payrolls coming in slightly above expectations, but revisions to the prior two months erased over 100k previously reported jobs.  The unemployment rate ticked up to 4.1%, a number not seen since 2021 and a full 0.7% higher than the 3.4% recorded at the beginning of 2023.  We also saw initial claims (job losses) higher than expected and JOLTS (job openings) data in line with the expectations but still significantly off the highs.  Given PCE came in at 2.6% at the end of last week, the Fed seems to be “landing the plane” as inflation comes down and the labor market weakens while the economy is still growing.

• With the market trading at all-time-highs, it seems to be pricing in the “goldilocks” soft-landing scenario
• The economy is still growing, albeit at a slower pace; inflation is coming down to the Fed’s target rate, and the job market is showing weakness
• All this data should give the Federal Reserve more room to cut interest rates in the second half of the year
• However, for the goldilocks scenario to continue to play out, inflation needs to continue to decline, and the job market cannot weaken significantly more
• While certainly possible, looking at the history of cycles in the labor market, the beginning is usually followed by an acceleration of weakening
• Often, the Fed is cutting as job losses are accumulating (see below chart of those reporting 27 weeks of unemployment)
• It seems there is more risk to the downside in the economy than to the upside at the current time
• ‍

Half the world votes

2024 is an unprecedented year in that almost 100 countries are holding elections.  The United States is obviously going to be electing our next president in November, but we also have elections throughout the Americas, Europe, and Asia.  Almost 4 billion people will be able to vote this year.  While each country’s situation is different, a common thread will be an incumbent leader who likely oversaw the post-Covid inflationary environment and will be under pressure by their opposition. Inflation has been a problem globally and is painful for the population.  This will make the opposition candidates and parties potentially more attractive.

• Given many of the world’s countries have recently been led by left-leaning governments, it is likely they are being challenged by their right-leaning opposition
• Populations, having just lived in a historic inflationary environment may be looking for a change
• This could usher in a wave of right-leaning leadership throughout the world
• Right-leaning governments are generally defined by a strong national identity, protectionist trade policies, and fiscal discipline
• The last bit however may not be possible despite fiscal deficits throughout the Western world
• Deficits can be closed by cutting spending and/or raising taxes, however, neither is politically palatable in the current environment
• Most governments, whether right or left, will likely continue deficit spending, risking potential future inflationary outcomes
• Perhaps this is what gold is sniffing out as we make our way through the year

‍