2024 July Market Update
Equity markets built on strong momentum from the first half, with the S&P 500 Index rising for the 10th consecutive July. The bond market also continues to show signs of a nascent recovery. Treasuries posted a third consecutive month of gains – their longest winning streak since 2021. The yield curve also continues to approach “normalization,” with yields the least inverted they’ve been in the past two years. Following a cooler-than-expected June CPI (Consumer Price Index – an estimator of consumer inflation) report, investors rotated out of “Big Tech” and Growth stocks into Value and Cyclical companies. Most “Magnificent Seven” names sold off, driving the most significant month of underperformance for the S&P 500 Index against the “Equal Weighted” S&P 500 Index since early 2021.
Technology and Momentum names have seen incredible inflows over the past several months, driving US Large Cap Growth outperformance over the broader market by one of the widest margins in history. As companies began to report 2nd Quarter earnings, cautious commentary on AI-related spending triggered a sharp, albeit relatively small, reversal of this trade. While still a net positive investment, there were clear signs of euphoric trading in “Artificial Intelligence” related stocks. Although it’s easy to get caught up in the “fear of missing out,” we continue to advocate for a more rational approach to investing. As Warren Buffett once said: “Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.” We continue to advocate for the benefits of a diversified portfolio, remaining conscious of valuations and owning high-quality businesses.
As major indices become increasingly concentrated, the importance of individual security selection rises. The sharp dissonance in July performance between the “average” stock and the S&P 500 Index highlights how the bellwether index is influenced by only a few, highly correlated, companies. In fact, a prominent market strategist has even stopped offering an S&P 500 target price, saying that the index no longer reflects the performance of the broad market. Over the long run, we feel investors would be poorly served making investment decisions based solely on index-level metrics. Even accounting for the trend reversal we saw during July, there remain significant opportunities in “unloved” pockets of the market. While concerns about AI-spending and sky-high valuations can potentially suppress returns for an index investor, the “average” stock trades at much more reasonable valuations. We can point to countless examples of high-quality, less publicized companies that entered this earnings season trading at depressed valuations but notably outperformed once they reported earnings. Should July’s rotation continue, identifying inflections in secular trends and idiosyncratic company catalysts amongst high-quality businesses has the potential to drive outperformance even if the broader market indices stagnate.
July also saw a rotation of capital into fixed income markets, driving a rally in bonds that has already begun to reward investors who locked in yields earlier this year. After nearly two years of dissonance between Federal Reserve commentary and fixed income investors, policy plans and market expectations have finally coalesced. While much, as always, is subject to change, it now appears likely we’ve seen peak rates and are within a month or two of beginning the rate cut cycle. In a corresponding move, money market and deposit rates across most banks have also started to work lower. Although rates still appear attractive, especially against much of the past decade, it’s clear the window is closing. Elevated cash positions, which have paid out generous interest rates over the past two years, will need to be evaluated as rates fall and the opportunity costs rise. Investors will have to decide whether to use their cash to lock in yields, increase their equity allocations, or make a tactical decision to remain on the sidelines.
As always, we are here to foster those discussions and help you make the best decision to reach your financial goals. We hope your summer is going well and look forward to hearing from you soon!
The information contained in this book does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of the author and not necessarily those of Raymond James. Expressions of opinion are as of the initial book publishing date and are subject to change without notice.
