Dear Friends,
For the first half of the year, the market spotlight has been on a handful of big tech companies that have been driving the markets. What has been less talked about is the fact that the performance of over 70% of stocks that make up the S&P 500 were lagging the S&P 500 index itself at the end of June. In our view, this unusually high divergence indicates potential risk, and we look to mitigate this risk through diversification. We have found that international exposure to Japan has provided a premium, and on the domestic side, exposure to home construction and the insurance sector have created a benefit. While the small-cap sector had a slow start to 2024, partly due to the Fed deferring the reduction of interest rates, it is now rallying and benefiting from the ongoing sector rotation. With all the uncertainty that lies ahead in the second half of 2024, it will be critical to maintain a well-balanced and diversified portfolio.
Last Wednesday, the Bureau of Labor Statistics released the U.S. Consumer Price Index (CPI) data, which is a measure of the average change over time in the prices paid by consumers for a basket of consumer goods and services. The intent for CPI is to measure inflation as experienced by consumers in their daily lives. For June, the CPI number showed a year-over-year increase of 3%, marking the smallest increase in 12 months. If more volatile items like food and energy are removed from the data, this is called Core CPI which rose by 3.3% from a year earlier. The lowest since April 2021. At the same time, 10-year Treasury yields have fallen to around 4.2%, a significant decrease from their April highs. With this yield decrease, it reflects that investors are more confident about holding long-term bonds for a higher total return. This change of sentiment can in part be attributed to the unexpectedly low inflation numbers for June. 1
With lower inflation, there is an increased likelihood that the Federal Reserve will cut interest rates. This is something that the market has been anticipating for quite some time now. In doing this, it will make borrowing cheaper and more accessible for small-cap companies, which often rely on debt for growth. Over the past week, we have seen increased volatility in the technology sector, leading to a notable sell-off. This was driven by concerns over high valuations and potential regulatory challenges. In contrast, small-cap stocks outperformed significantly during this period. The shift in investor sentiment towards small-cap stocks was influenced by their relative undervaluation and growth potential, reflecting a broader market rotation away from overextended tech stocks toward more diversified growth opportunities. Within US large-cap companies, we witnessed a shift from “growth-oriented” companies to “value” companies, such as insurance, banking, and healthcare. Quality companies with strong fundamentals are more resilient during market rotations. While Nasdaq and S&P 500 were pulling back, other asset classes such as bonds, European equities, and Japanese equities served well as diversifiers.
As we enter a new earnings season, we anticipate several challenging factors for global capital markets, including election year dynamics, fiscal policy changes, and evolving monetary policy. Navigating these factors will be crucial for the remainder of 2024. Maintaining a balanced portfolio across asset classes while staying flexible to adjust as clearer signals emerge is critical. The Legacy Foundation remains committed to guiding our clients through these complex global market conditions.
Sources:
(1) www.bls.gov
All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise, and bonds are subject to availability and change in price.
Investing in stock includes numerous specific risks, including the fluctuation of dividends, loss of principal, and potential illiquidity of the investment in a falling market.
Investing in foreign and emerging market securities involves special additional risks. These risks include but are not limited to currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.
Investment advice offered through Private Advisor Group, a registered investment advisor and separate entity from The Legacy Foundation.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
The Legacy Foundation and LPL Financial do not offer tax advice.
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