Market Navigator – June 2024 edition

Market Navigator

June 5, 2024

This monthly publication provides regular and timely economic and investment strategy views.

May flowers

Following a challenging April, where stocks witnessed the first 5% pullback of the year, markets rebounded sharply in May. Indeed, global markets rose 4%, with U.S. large caps gaining nearly 5%. For the S&P 500, which reached an all-time high, this represents the sixth month of gains out of the last seven.

The rebound was aided by inflation reports that were more benign relative to the upside surprises seen in prior months, a pullback in the 10-year U.S. Treasury yield, and a big jump in growth stocks. The S&P 500 technology sector, aided by a 26.9% gain in NVDIA, jumped 10.1% for the month.

Our Take

The weight of the evidence suggests we remain in a bull market. That’s one of the reasons we upgraded equities on the stock market pullback in late April. Historically, the median bull market has returned 108% over 4.6 years vs. the current gain of 49% over the past 1.6 years.

Moreover, in 9 of the 10 previous bull markets since the 1950s, returns were stronger than the current one. And even while the market has moved a long way over recent months, stocks appear less stretched when zooming out a few years. Indeed, the S&P 500 is up just 10% from the January 2022 peak (stocks suffered an intra-year decline of nearly 25% that year).

That said, the recent move for the S&P 500 to all-time highs had some blemishes. That is, several segments of the market, such as small caps, mid caps, industrials, and financials are still trading below the April peak.

Markets are generally considered healthier when there is broad-based participation. This way, if one segment starts to recede, another area can take the baton and keep the market moving higher. This lack of participation is not enough to change our overall positive view, but we would welcome some broadening of the rally, especially as the top 10 stocks in the S&P 500 now account for 34% of the index, the highest in at least the past 45 years.

The good news is these large growth stocks are also powering overall profit trends higher, with forward S&P 500 earnings estimates finishing the month at yet another record high.

Crosscurrents abound into the summer

The choppier environment that we witnessed over recent weeks appears set to continue near term. We are past the earnings season, leaving investors to focus on a data-dependent Federal Reserve (Fed), inflation, interest rates, and, of course, a heating up of the presidential election.

Over recent weeks, we have seen a cooling in both economic growth and inflation trends. Our house view remains this is more of a normalization from strong economic growth levels toward trend growth, but this backdrop creates a delicate balance for the Fed to maneuver. 

With the real, or inflation-adjusted, Fed Funds rate at the most restrictive level since 2007, there is the risk that if they wait too long to cut rates, it will hurt the economy. On the other side, concerns remain that inflation will stay sticky, limiting the ability to act swiftly. Our team’s base case is there will be enough evidence to cut rates later this fall, at least once, and probably twice by the end of the year. Still, this suggests each economic report will be overly scrutinized, creating a more volatile backdrop.

The November elections will also garner increased attention as we move into June on the heels of the first presidential debate as well as the naming of the Republican candidate for Vice President.

Elections play a role and can add to market volatility; however, an objective review of the historical data indicates that Washington’s perceived influence on market returns may be overstated and should not be viewed in isolation, something we provide more detail on in a separate special report released earlier this month (Elections & markets: Conventional wisdom often wrong). 

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