Monthly Market Update – June 2024

Key Points

• HERE WE GO AGAIN – The Magnificent 7 are back and stronger than ever. Apple, Amazon, Alphabet (Google), Meta Platforms (Facebook), Microsoft, NVIDIA, and Tesla are once again collectively, and almost solely, driving equity returns. In the first half of 2024, the S&P 500 Index was up +14.5%, excluding the Mag 7, left the S&P 500 up just 4%.
  
• RATES ARE DROPPING GLOBALLY – The guessing game on when and how many times the U.S. Federal Reserve will cut interest rates this year has been a pivotal theme for market watchers. But outside the U.S., rates are already on the decline. In May and June there have been more than 10 central banks that have cut their policy rates.
  
• ODDS FOR A SEPTEMBER FED CUT SURGE – As rates fall overseas, the U.S. economy is slowing, and inflation is decelerating. As a result, markets have dramatically repriced the odds that the Fed will cut rates in September. Markets see a greater than 75% chance of a September rate cut now versus just a week earlier when odds were 64%, and a month earlier, markets were pricing in just a 50% probability of a September rate cut.
  
• SHOPPING SLOWS TO A STANDSTILL – One of the reports towards the end of June that really helped encourage the repricing of a September rate cut was the May report on U.S. Retail Sales. That showed sales barely rose in May, and April was revised lower from a 0.0% flat initial reading to -0.2% decline. Retail sales represent about one-third of all consumer spending, and the deceleration likely led to a more dovish Fed.
  
• HOME AFFORDABILITY IS DOWN, AND OWNERSHIP COSTS UP – Housing affordability is the worst it’s ever been as the median selling price of a home in the U.S. is now 5.7x the median household income. And for those Americans that have achieved home ownership, the costs to upkeep a typical home has increased +26% since the pandemic. If the Fed cuts rates, it would provide relief to current and would-be homeowners.

Market Summary

Asset Class Total Returns

Source: Bloomberg, as of June 30, 2024. Performance figures are index total returns: US Bonds (Barclays US Aggregate Bond TR), US High Yield (Barclays US HY 2% Issuer-Capped TR), International Bonds (Barclays Global Aggregate ex USD TR), Large Caps (S&P 500 TR), Small Caps (Russell 2000 TR), Developed Markets (MSCI EAFE NR USD), Emerging Markets (MSCI EM NR USD), Real Estate (FTSE NAREIT All Equity REITS TR).

U.S. Stocks didn’t wait until Independence Day to start the fireworks as the second quarter built on the successes of the first quarter. The quarter started off a little rough, falling -4.1% in April, which is the only down month so far this year for the headline S&P 500 Index. It didn’t stay down long, rebounding nicely in May and June with total returns of 5.0% and 3.6%, respectively. As a result, the S&P 500 finished the second quarter up +4.3% and just below its all-time high set on June 18. Combined with the +10.6% gain in the first quarter, the S&P posted its best-ever first half of a presidential reelection year, with a total return of +15.3%. At face value, it has been an impressive showing for stocks, with the S&P posting 31 record highs through the first half of 2024, the fifth most to start a year. June was the seventh positive month in the last eight and has been up in six of the last seven quarters. This year’s momentum has been particularly notable when we reflect on how we entered the year. Coming into 2024, investors were expecting the Federal Reserve (the Fed) to lower rates 6-7 times. And yet here we are at halftime with no rate cuts yet, plus yields are up more than +50 basis points across most of the yield curve. Nevertheless, the market has charged ahead. But the gains haven’t come without a number of quibbles. Chief among them is the lack of breadth in the advance. Much like the end it was in the first quarter, performance in the second quarter was driven by just a handful, or two, of giant cap, tech-oriented stocks. As discussed in the “Here We Go Again” section below, the S&P500 would have only been up about +4% without the Magnificent Seven (the Mag7) giant cap stocks. In contrast, the small cap Russell 2000 Index had a -1.1% total return for June and was down -3.3% for the second quarter, leaving it with just a +1.7% total return for the first half of the year. That is the widest margin of quarterly underperformance to the S&P 500 (-7.6%) since the fourth quarter of 2021 and the biggest underperformance for the first half of a year (-13.6%) since 1998. 

Those kinds of big performance divergences in 2024 aren’t just by market capitalization. Growth stocks outpaced value stocks across market capitalizations. Over capitalizations, the Russell 3000 Growth Index outperformed the Russell 3000 Value Index by +7.4% in June, the largest monthly outperformance since May 2023. For the quarter, the Russell 3000 Growth was +10.0% higher than its Value counterpart, and for the first half, Growth was +13.7% ahead of Value.

Internationally, we witnessed some similar divergences. Non-U.S. developed market stocks, as measured by the MSCI EAFE Index, fell in June and the second quarter with total returns of -1.6% and -0.1%, respectively. That put the one-month underperformance to the S&P 500 at -5.2%, the biggest monthly deficit since April 2020. For Q2, the U.S. outperformed by +4.7%, following Q1’s +4.8% outperformance. Meanwhile, the MSCI Emerging Market Index was up +4.0% in June and +5.3% for Q2 (actually outperforming the S&P 500 for the month and quarter). 

All that positive performance for U.S. large cap stocks has left sentiment and valuations stretched. It came in the face of economic data that has clearly softened, although not by any alarming standards. After an initial pick-up in April, U.S. economic data slowed over the second quarter and has generally been coming in below consensus expectations since early May. Of course, soft U.S. economic data meant that investors became more hopeful for Fed policy easing, and fed fund futures were pointing to two rate cuts by the end of the year. The economy appears to be in a late-cycle stage but continues to be incredibly resilient and, so far, has been able to avoid recession and keep the so-called soft-landing intact. Again, yields rose early in the quarter on robust job creation and sticky inflation data, but in May and June, U.S. Treasury yields were down across the curve. The key 10-year U.S. Treasury yield closed June at 4.40%, while the 2-year U.S. Treasury yield was at 4.75%. With yields down, the Bloomberg U.S. Aggregate Bond Index gained +1.0% for the month and +0.1% for the second quarter but are still -0.7% underwater year-to-date. While that pales in comparison to equity returns, U.S. bonds are handily outperforming non-U.S. bonds (the Bloomberg Global Aggregate ex U.S. Bond Index), which are down -0.5%, -2.1% and -5.3% for the month, quarter, and first half respectively.

Source: Bloomberg. Data as of June 30, 2024.
Price Returns for Equity, Total Returns for Bonds.
* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.

Quick Takes

HERE WE GO AGAIN

We’ve discussed the Magnificent 7 (Mag 7) numerous times in the first half of 2024, and as recently as late April, we were encouraged to see the market broaden out as the Mag 7 became just the Fab 4. But in June, the Magnificent 7 were back and stronger than ever. As a reminder, the Magnificent 7 includes Apple, Amazon, Alphabet (Google), Meta Platforms (Facebook), Microsoft, NVIDIA, and Tesla. As shown below, in the first half of 2024, the price of the S&P 500 Index was up +14.5%. But taking out just one stock – NVIDIA, the top performer with a +149.5% gain – left the S&P 500 up about +8%. Further, excluding all the Mag 7 left the S&P 500 at just 4%. In fact, only 25% of the stocks in the S&P 500 were beating the overall index, on pace for one of the lowest number of stocks to beat the index since 1974. We have cautioned before that such narrow markets are hard to sustain. Strong, durable portfolios should have multiple drivers of return that provide an offset when certain factors are out of favor. We expect we will see a return to a broadening market in the second half of the year.

S&P 500 Year-to-Date Performance

% Return With and Without the Mega Caps

Source: Bespoke Investment Group.

RATES ARE DROPPING GLOBALLY

One of the biggest themes in macroeconomics in 2024 has been when and how many times the U.S. Federal Reserve will cut interest rates. But outside the U.S., rates are already on the decline. Beginning in the second quarter, there has been a clear pivot of global central bank policymaking from rate hikes to rate cuts. In May and June there have been more than 10 central banks that have acted on their policy rates, and all have been cuts. The central bank of the Czech Republic was the latest after they unexpectedly cut rates by -50 basis points at the end of June to 4.75%. The central banks of Argentina, Brazil, Canada, Chile, Columbia, Denmark, the eurozone, Peru, and Switzerland have all cut their policy rates since May. As shown in the chart below, the Global GDP-Weighted Policy Rate has clearly peaked and is now rolling over. The looser monetary policy will be a tailwind for risk assets as we head into the back half of 2024, and the decline is expected to continue into 2025, especially when the world’s larger economies, like the U.S., join the rate-cutting parade.

Global Central Bank Policy Rates Slowly Decline

Global GDP-Weighted Policy Rate (%)

Source: Bespoke Investment Group.

ODDS FOR A SEPTEMBER FED CUT SURGE

With central banks cutting rates overseas, economic data trends in the U.S. show the economy slowing while inflation decelerates. As a result, Fed fund futures markets have dramatically repriced the odds that the Fed will cut rates in September. Just a week prior to the end of the second quarter, the probability of a September rate cut was 64%, and a month prior to quarter end, markets were pricing in just 50% odds of a cut in September. But, underwhelming economic reports led to the spike in the probability of a rate cut. The unemployment rate for June unexpectedly increased to 4.1%, the highest level since November 2021. The pace of new jobs fell to 1.7% in June, the slowest pace since March 2021. Wage growth is down to a 3.9% annual rate, the lowest since May 2021. The Fed’s preferred inflation gauge, Core PCE, has slowed to 2.6% year-over-year, which is the lowest since March 2021. There are still a few important reports left before the September 18 Fed decision, and any meaningful upside surprises in inflation could sink these probabilities. But comments from Fed Chairman Jerome Powell over the last couple of weeks seem to reinforce the optimism for the Fed to join other global central banks with a rate cut.

Target Rate Probabilities for Sept 18, 2024 Fed Meeting

Current target rate is 525 – 550

Source: CME FedWatch via @charliebilello. Data as of July 7, 2024.

SHOPPING SLOWS TO A STANDSTILL

One of the reports towards of the end of June that really helped encourage the repricing of a September rate cut was the May data on U.S. Retail Sales by the Commerce Department. That showed sales barely rose in May, inching up just +0.1%, below Wall Street expectations for a +0.3% increase. Moreover, the prior month was revised lower from a 0.0% flat initial reading to -0.2% decline. Retail sales represent about one-third of all consumer spending and offer clues on the strength of the economy. One of the surprise detractors in the report was a -0.4% drop in spending at bars and restaurants, which has now fallen in four of the past six months for the first time since the pandemic. Restaurant sales tend to rise when the economy is healthy, and consumers feel secure in their jobs and tend to fall during times of economic stress. Sales still indicate steady growth, but they have decelerated which may have led to some of the more dovish public commentary by Federal Reserve policymakers recently.

Retail Sales Barely Rise in May and April was Revised Lower

U.S. Retail Sales, Monthly % Change

Note: Seasonally Adjusted
Source: U.S. Census Bureau via St. Louis Fed, The Wall Street Journal.

HOME AFFORDABILITY IS WORSE THAN EVER

The Fed strives to maintain its independence from political pressures, but housing affordability is one area that has fueled public and political pressure on the Fed to reduce rates. The housing market has been one of the strongest aspects of the U.S. economy since the pandemic. But home prices have climbed steadily, and like the stock market, they have set new high, after new high. A dearth of supply has also maintained upward pressure on home prices. Those factors, combined with mortgage rates above 7%, have resulted in the least affordable housing market we’ve ever seen. The median selling price of a home in the U.S. is now 5.7x the median household income. Said differently, the median American household would need to spend 43% of their income to afford the median-priced home for sale. Over the last 20 years, the median salary has increased from $42,500 in 2004 to $54,000 in 2024. Meanwhile, the median home price has jumped from $184,000 to $532,000. So, the median salary is up +27% in the last 20 years while the median home price has surged +190%. By no means are those dynamics the result of Fed policy, but the Fed is certainly aware of the home affordability crisis and recognize that some relief in rates would be welcome news to the housing market.

Housing is Less Affordable Than Any Time in 40 years

Home Prices as a Multiple of Household Income

Source: Trahan Macro Research.

THE COST OF HOMEOWNERSHIP HAS SPIKED TOO

Not only has purchasing a home become a hardship, but even for those that have achieved home ownership, the costs to upkeep a typical home has increased +26% since the pandemic. Since 2020, expenses such as property taxes, home insurance, energy costs, utilities, and maintenance expenses have all soared. According to personal finance website Bankrate, the average annual cost for owning and maintaining a typical single-family home — not including mortgage payments — totaled $18,118 in March 2024. That works out to $1,510 a month, roughly $300 more than four years earlier when pandemic lockdowns began.

Homeownership Expenses Are Spiking

States with the largest percentage jumps in homeownership costs

Source: Bankrate, Bloomberg.

Asset Class Performance

The Importance of Diversification. Diversification mitigates the risk of relying on any single investment. It offers many long-term benefits, such as lowering portfolio volatility, improving risk-adjusted returns, and helping investments to compound more effectively.

Source: Bloomberg.

Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by The Retirement Planning Group. The performance of those funds may be substantially different from the performance of the broad asset classes and to proxy ETFs represented here. US Bonds (iShares Core US Aggregate Bond ETF); High‐Yield Bond (iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (SPDR® Bloomberg Barclays International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares US Real Estate ETF). The return displayed as “60/40 Allocation” is a weighted average of the ETF proxies shown as represented by: 30% US Bonds, 5% International Bonds, 5% High Yield Bonds, 10% Large Growth, 10% Large Value, 4% Mid Growth, 4% Mid Value, 2% Small Growth, 2% Small Value, 18% International Stock, 7% Emerging Markets, 3% Real Estate.

* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.

Chris Bouffard is CIO of The Retirement Planning Group (TRPG), a Registered Investment Adviser. He has oversight of investments for the advisory services offered through TRPG.

Disclaimer: Information provided is for educational purposes only and does not constitute investment, legal or tax advice. All examples are hypothetical and for illustrative purposes only. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed. Please contact TRPG for more complete information based on your personal circumstances and to obtain personal individual investment advice.