Market Update July 17, 2024
Stocks had a serious case of bad breadth in the second quarter of 2024. On the surface, one would think stocks had a great quarter with the S&P 500 up 4.3%. However, not unlike what we saw in 2023, the gains in this capitalization weighted index were heavily influenced by a very small number of large technology stocks. The S&P 500 equal weight index, by comparison, was down 2.6% in the quarter. Small company stocks languished as well with the S&P 600 down 3.1%. The narrow leadership within the S&P 500 is at historic levels. Just five stocks accounted for 63% of the S&P 500’s 15.3% return through the first half of the year. One of these stocks was up 150% and accounted for an astounding 31% of the index’s return.
With the huge run-up in technology stocks, investors are rightfully wondering if this is a bubble on the verge of collapsing. It is a valid concern as many mutual fund managers have piled into the big tech stocks out of fear of underperformance versus the S&P 500. And, index funds based on this index have become extremely popular. As money comes into the index funds, the managers must buy more shares, regardless of valuations. As money goes out, they are required to sell to meet redemption requests. This can create a stampede effect – great when things are going up, not great if you are standing in the exit.
While technology stocks may be due for a correction, I am excited about the long-term outlook for other areas of the stock market. Times of extreme disparities in performance and high levels of concentration in the S&P 500 can mark turning points in leadership, and we are long overdue for a shift. Recall that in 2022 it appeared that the long-awaited “Great Rotation” from growth stocks to value stocks had finally arrived, only for tech stocks to resume their leadership role in 2023 and through the first half of this year. We may have finally hit a turning point on July 11th when an inflation report came in better than expected, boosting expectations that the Federal Reserve will begin cutting interest rates in September. The rotation in leadership in stocks has been dramatic as money has moved into less expensive cyclical stocks and out of the pricey technology stocks. Small company stocks in particular look like they have been shot out of a canon. Whether or not this will mark the beginning of a longer-term trend remains to be seen, but in any event, it is a positive sign when leadership broadens like it has.
U.S. technology stocks were not the only ones to have had a good second quarter. The MSCI Emerging Markets index was up a strong 5%. Established foreign market stocks were less fortunate, down a fraction of a percent as measured by the MSCI EAFE index. Bonds too were lackluster, with the Bloomberg US Aggregate index up a tenth of a percent. All three of these asset classes have had a very good start to the third quarter fueled by the recent inflation report.
On the financial planning front, many people eagerly start their social security benefits as soon as they are eligible. In many if not most cases, this can have a detrimental impact on their financial situation throughout retirement. I saw an insightful article in Barron’s a few weeks ago highlighting an overlooked provision that allows people to suspend their benefits once they reach full retirement age. This allows their benefit to grow 8% per year up until age 70 with benefits increasing incrementally for every month delayed. Cost of living adjustments are added as well. Quite often it can be beneficial for retirees to draw more heavily on retirement assets for a short period while they allow their social security benefits to grow. Please let me know if this is something you would like to discuss.
As always, I welcome the opportunity to discuss any questions or needs you may have.
Sincerely,
Glenn S. Rank, CIMA®
Certified Investment Management Analyst®
President
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· The S&P 500 is an unmanaged capitalization-weighted index of 500 widely held stocks that’s generally considered representative of the U.S. stock market. The S&P 500 Equal Weight index is the equal-weight version of the S&P 500. The S&P 600 Index is a capitalization weighted index comprised of 600 stocks viewed as having a relatively small market capitalization, chosen for market size, liquidity, and industry group representation. The MSCI EAFE index and the MSCI Emerging Markets index are unmanaged indexes compiled by Morgan Stanley Capital International that are generally considered representative of the developed international stock market and emerging international stock market, respectively. International securities involve additional risks including currency fluctuations, differing financial accounting standards, and possible political and economic volatility, and may not be suitable for all investors. Investing in emerging markets can be riskier than investing in well-established foreign markets. Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. The Bloomberg US Aggregate Bond index is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the U.S. Inclusion of these indexes is for illustrative purposes only. Note that bond prices rise when yields fall, and vice versa, due to the inverse relationship between bond prices and yields. Keep in mind that individuals cannot invest directly in any index and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary.
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