2024 Second Quarter Review and Outlook
Dear Clients,
Major equity indices continued to rally in the second quarter, though a closer look reveals a stark divide between the handful of large cap US tech stocks led by Nvidia that kept rising, and the rest of the market, which has spent the past three months treading water. Altogether the so-called “Magnificent Seven” (Alphabet, Amazon, Apple, Microsoft, Nvidia, Meta, Tesla) account for roughly two thirds of the S&P 500’s 15% year to date gain. Excluding these leaders, the other 493 stocks in the index have returned a more muted 5%.
To do them justice, the Magnificent Seven also account for the lion’s share of earnings growth year to date.1 This is expected to even out in the second half as an increasingly broad group of companies post higher profits.2
Bond markets ended the quarter little changed. Modestly negative returns reflected the stickiness of inflation over the past several months and the resulting delay in widely anticipated Fed rate cuts.3 Overall, interest rates ended the quarter roughly a half percent above where they started the year.4
Outlook
As we move into the second half of the year, the US economy is growing at a roughly 2% pace,5 slower than last year but still impressively resilient in the face of much higher interest rates.
Inflation has fallen from its peak in June 2022 of over 9% to around 3% and seems poised to decline further in the coming months towards the Federal Reserve’s target of 2%.6
Corporate profits are growing at an above-average 11% clip.7 US companies have held down costs while taking advantage of sales gains, and this trend has been broadening with a wider group of companies reporting rising earnings.
Unemployment remains close to its all-time low of 4% and the job market appears to be in a state of equilibrium after the overheated conditions that followed the pandemic.
The Federal Reserve has reason to be pleased with these numbers since they suggest that it has succeeded in its aggressive campaign to curb inflation, while managing to keep the economy out of recession.8
Looking forward, it seems likely that growth will slow further. Though unemployment is low, the labor market shows signs of cooling:9 job vacancies are down, wage growth is easing, and fewer employees are quitting,10 presumably because better offers are getting harder to find.11
Higher rates have not killed the recovery, but evidence of stress in low and middle-income households is building. After depleting their covid-era savings consumers shifted spending to credit cards,12 but recent data shows that outlays on non-essential items are now slowing.13
Meanwhile, credit card and auto loan delinquencies have started to rise, indicating that people are feeling squeezed.14 While the “wealth effect” from stock market gains has benefited the affluent, lower income families are struggling to cover the high costs of groceries, auto loans, insurance, and housing.15 This bifurcation between higher and lower income consumers may help explain the widespread gloom regarding the economy, despite the overall rosy data.
Signs of slowing growth can also be found in US manufacturing, as well as in auto sales, construction, and home sales.16 If corroborated by a further decline in inflation, this downshift should allow the Fed to begin “normalizing” (i.e. cutting) interest rates. Fed-watchers predict at least one cut by year-end, followed by several more in 2025.
Taken together, slow but sustainable growth, low unemployment, healthy corporate profits, and moderate inflation add up to an environment that should benefit financial assets. Though the high valuations of large-cap growth stocks may constrain further market gains, attractive investment opportunities remain in bonds as well as in the smaller companies and international equities that have lagged the rally.17
The main risk to this benign outlook is if the Fed waits too long to cut interest rates, allowing the economy to stall. Bond investors would benefit from such a slowdown, but equity markets would be hard pressed to justify current valuations in an environment of negative growth.18 It has also been clear for months that this year’s US elections will be a source of uncertainty and market volatility. While elections can be stressful, however, investors are usually better off avoiding impulsive changes to their financial strategy and remembering that stock markets tend to rally after elections as uncertainty dissipates, as we saw even in 2016.
LongView News
The LongView team was happy to take part in several community events this quarter. In May, we joined forces with clients and friends for a cleanup of the historic Acequia Madre (the main Spanish Colonial-era irrigation ditch in Santa Fe) under the guidance of the Santa Fe Watershed Association. In June, we sponsored and marched in the annual Santa Fe Pride parade.
Starting in April, David and Leah launched a monthly father-daughter opinion column in the Santa Fe New Mexican entitled ‘Cantor's Corner’ focusing on the intersection of personal finance with broader social, economic, and political issues. If you missed the articles in the paper, you can find them on the Points of View tab at our website: www.longviewasset.com.
This September, we will host our annual garden party at our building on Grant Avenue, featuring a presentation from the New Mexico Historic Women Marker Program. Please look out for the invitation in the coming weeks.
We wish you a beautiful summer, and hope that the monsoons, which have come early to Santa Fe this year, continue to bless us!
The LongView Team
This material is intended for educational purposes only. The information and opinions expressed on any websites linked in this material are from unaffiliated third parties, and while they are deemed trusted and reliable, we cannot guarantee their accuracy. None of the information provided is intended as investment, tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This information should not be relied upon for transacting securities or other investments. Under no circumstances shall LongView be liable for any direct, indirect, special or consequential damages that result from the use of, or the inability to use, the materials provided. In no event shall LongView Asset Management, LLC have any liability to you for damages, losses, and causes of action for accessing this commentary. Past performance is not indicative of future results. This content not reviewed by FINRA.
Photo by Raychel Sanner on Unsplash.
[1] JP Morgan Asset Management, “Guide to the Markets,” US, 3Q 2024, June 30, 2024. https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/
[2] JP Morgan, “Guide to the Markets.”
[3] JP Morgan, “Guide to the Markets.”
[4] JP Morgan, “Guide to the Markets.”
[5] JP Morgan, “Guide to the Markets.”
[6] JP Morgan, “Guide to the Markets.”; Nazareth, Rita, “Stocks Up as Path to September Fed Cut Gets Wider: Markets Wrap”, Bloomberg, July 4, 2024. https://www.bloomberg.com/news/articles/2024-07-04/asian-equities-to-tread-water-before-us-jobs-data-markets-wrap.
[7] JP Morgan, “Guide to the Markets.”
[8] Savaira, Augusta. “Fed’s Favored Inflation Gauge Slows, Supporting Case for Cut.” Bloomberg, June 28, 2024. https://www.bloomberg.com/news/articles/2024-06-28/fed-s-favored-price-gauge-rises-at-slowest-pace-in-six-months?cmpid=BBD062824_CUS
[9] JP Morgan, “Guide to the Markets.”
[10] JP Morgan, “Guide to the Markets.”
[11] Dillard, Jarrell. “US Job Openings Fall to Lowest Since 2021 in Broad Cooldown.” Bloomberg, June 4, 2024.https://www.bloomberg.com/news/articles/2024-06-04/us-job-openings-fall-further-to-lowest-since-february-2021?cmpid=BBD060424_CUS
[12] JP Morgan, “Guide to the Markets.”
[13] Coggins, Becca, et all. “An update on US consumer sentiment: Are consumers on the cusp of a shift?” Mckinsey and Company, May 31, 2024. https://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/the-state-of-the-us-consumer
[14] JP Morgan, “Guide to the Markets.”
[15] Lane, Terry. “Will The Pace of Consumer Spending Slow in the Second Half of 2024?” Investopedia, June 30, 2024. https://www.investopedia.com/consumer-spending-h2-2024-preview-8668759
[16] Sasso, Michael. “New US Home Construction Plunges to Slowest Pace Since June 2020.” Bloomberg, June 20, 2024. https://www.bloomberg.com/news/articles/2024-06-20/new-us-home-construction-plunges-to-slowest-pace-since-june-2020?cmpid=BBD062024_CUS
[17] JP Morgan, “Guide to the Markets.”
[18] JP Morgan, “Guide to the Markets.”