Second Quarter Review of 2024

Market Concerns

The three major concerns that have been worrying the stock market for the past several years are inflation, high interest rates, and earnings from companies that are not huge. While none of this was resolved during the second quarter, we did get a possible glance into the future. On July 11^th, the government reported that the consumer price index fell slightly from May, bringing the inflation rate to 3%. Even better, the core prices, which exclude food and energy items, rose just 0.1% in June. This was the lowest since January 2021.

This was a significant change from the year's first half when the economy was heating up again. In addition, job creation in June was down from prior months, and the unemployment rate rose slightly, from 4% to 4.1%. With the release of this data, interest rates on U.S. Government debt went down.

As I write this, earnings reporting for the second quarter is just beginning. In the fourth quarter of 2023, the gross domestic product (GDP) grew by 3.4%; in the first quarter of 2024, it grew by 1.4%, a significant slowdown. A concern would be to see the GDP go even lower for the second quarter, perhaps indicating that the economy is stalling. A stalling economy is not what the Fed wants to see.

FED Impact

This portends the Fed lowering the interest rate, with continued slowing of inflation. These two changes will be significant. In addition to being beneficial to fixed-income securities, such as bonds that increase in value as rates decrease, it will also reduce consumer borrowing costs, auto mortgages, etc., and commercial loans used by businesses. It will also reduce the interest cost on an increasing federal deficit. It appears likely that the Fed will change at either their next meeting at the end of July, or they may lay the roadmap to a reduction in rates for their mid-September meeting.

Market Performance

The surge that began in November 2023 and continued during the first quarter of 2024 stopped in the second quarter. Most indexes for the quarter were down. The S&P 500 continued to advance, but it is no longer a diversified index. This index is based on the market capitalization of each stock. This means that the largest stocks carry the biggest impact on the index. At the quarter's end, ten stocks comprised 37% of the index. In addition, the seven largest stocks, known as the Magnificent 7, accounted for 28% of the first quarter’s earnings for the index, while the remaining 493 stocks had a gain of 4%. By comparison, if you look at the equally weighted S&P 500, where market capitalization is eliminated, the S&P 500 EW is up 3.28% for the year, losing 3.26 from the beginning when it was up 6.54. This is then very much in line with other indexes.

Most equity indexes were down, with the DJIA falling from 5.6% in the first quarter to 3.8% in the second quarter, the NYSE Composite up 8.7% in the first quarter, moving down to 7%, and the MSCI ACWI ex USA (international index), up 4.0% in the first quarter, remaining unchanged.

At the end of the first quarter, the Bloomberg Aggregate bond index was up 2.37% for one year, while at the end of the second quarter, it was up only 2.13% for one year.  The Bank of America 100 High Yield Index, up 11.7% for one year in the first quarter, was up 10.06% for one year in the second quarter. Thirty-year mortgage rates at 7.38% at the end of the first quarter rose slightly to 7.47% in the second quarter. Likewise, auto loans grew from 7.87% to 7.94%           

Looking ahead

Companies will report their earnings for the second quarter in the next four weeks. The Fed will also be meeting during this period. If inflation retreats, job creation slows down, earnings do not look great, and the GDP is down for the second quarter, there will be pressure on the Fed to begin reducing rates in July or September. The last thing the Fed can allow is the economy to go negative, especially in an election year.

Future Market Expectations

As I’ve reported numerous times, the markets do not like uncertainty. There is great uncertainty surrounding inflation, the Fed's position on interest rates, and corporate earnings. However, another uncertainty that will not be clear until November is the U.S. elections.

I believe that a well-diversified portfolio is still the best approach. However, it would not surprise me to see marginal results in the third quarter, as all these uncertainties affect the markets. If the Fed reduces rates, it will positively impact bonds, mortgages, car loans, and other consumer credit. It will also have a positive impact on borrowing costs for corporations. While all this is good, the market may still go down amid uncertainty about the election and corporate earnings for the third quarter. I would not be surprised if the Fed reduces the interest rate again before the year ends. In that case, it would appear that inflation is less worrisome, interest rates are going down, and corporate profit could pick up in the fourth quarter.

Ed Mallon