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Key Takeaways, Second Quarter 2024

By Ralph Goldsticker, CFA | Jul 2024

The ongoing rally in a handful of mega-cap tech stocks (the Magnificent 7) resulted in positive returns for the broad stock market. Treasury rates rose slightly at the longer end of the yield curve. Investors’ focus remained on the Fed. The economy continued to show resilience, and corporate earnings were healthy. Inflation continued to trend down, albeit slower than the Fed hoped.

The Fed held rates steady at its meetings. It continues to state that bringing inflation under control remains its top priority, and the timing of future cuts will be data-driven. Their comments and the dot plot suggest there will be one or two rate cuts by year-end. However, some economists are forecasting none. By contrast, after the Q4 bond rally, the forward curve at year-end 2023 suggested investors were expecting as many as six cuts in 2024.

The consensus continues to be that the economy will achieve a “soft landing.” While inflation continues to be a bit above the Fed’s target, its trend is in the right direction, and fears of persistent high inflation have disappeared

Equities

US and emerging market stocks gained. The broad US market gained 3%, while small caps lost 3%. Hurt by a stronger dollar, developed international stocks fell 0.4%, while emerging market stocks rose 5%.
The broad US stock market was up 23% for the last 12 months. Lacking the Magnificent 7, small caps were up only 10%. The US stock market is up 76% since year-end 2019 (pre-pandemic),
13% annualized.
In Q2, as in Q1, with the inclusion of the Magnificent 7, Growth stocks outperformed Value (8.3% vs -2.2%). Growth outperformed for all trailing periods, by 21% for the last 12 months (34% vs 13%), 10% per annum for the last 5 years (19% vs 9%), and 8% per annum for the last 10 (16% vs 8%). Since the start of the pandemic (year-end 2019), Growth outperformed Value by 10.5% per annum).
International stocks lagged US due to a stronger dollar and weaker economic news overseas. Developed were down 0.4% in Q2; and up 11.6% over the last 12 months. Emerging markets were up 5%.

Fixed Income

Core Bonds were flat. Due to the Fed’s continuing pause, long Treasuries declined. Positive economic news resulted in credit spreads widening a bit.
The target Fed Funds range remains at 5.25% to 5.50%, unchanged since the July 2023 meeting.
3-month T-bills finished the quarter yielding 5.36%, down 1 bp for the quarter, and up 1 bp YTD.
10-Year Treasuries were yielding 4.40%, up 20 bps in Q2; 52 bps YTD. The yield is still down 59 bps from its recent high.
Investment Grade (IG) bond spreads widened by 3 bps to 88 bps. High Yield by 10 bps to 3.09%. IG spreads are 2 bps narrower than year-end 2019, and High Yield 27 bps narrower.
The break-even of 5-year TIPS fell 16 bps to 2.28%, the BE on 10-year TIPS rose 3 bps to 2.37%. Both suggest that investors believe it is unlikely that inflation will spike.