Nasdaq & S&P 500 Rally in First Half of 2024
Despite still-elevated inflation and uncertainty around monetary policy, all three major equity indexes were up in the first half of 2024 on the back of AI-technology optimism and strong earnings. Notably, the Nasdaq Composite gained 18.6% and the S&P 500 increased 15.3%, while the Dow Jones Industrial Average was up 4.8%. US growth stocks (+23.5%) were among the best performers, followed by US large-caps (+15.2%) and emerging market equities (+7.7%). Bonds were mixed as high yield credits and Treasury Inflation Protected Notes rose (+2.3% and +1.4%, respectively) while 7-10 year US Treasuries and the US Aggregate Bond Index fell (-1.5% and -0.6%, respectively). Commodities fared well as silver was up 22.0%, crude oil gained 19.4%, gold increased 12.5%, and broad-based commodities rose 5.0%.
Fed Signals Only One Cut Coming this Year
The Federal Reserve kept interest rates unchanged at the June FOMC meeting, leaving the fed funds rate at the 5.25–5.50% range. Although the May Consumer Price Index (CPI) release ahead of the meeting suggested inflation eased slightly, Fed Chairman Jerome Powell stated, “We don’t see ourselves as having the confidence that would warrant beginning to loosen policy at this time.” This was further expressed in the updated Summary of Economic Projections, in which the median dot plot signaled only one 25 bps rate cut to occur by the end of the year, down from three cuts indicated in March. Moreover, policymakers increased their year-end inflation forecast via the core Personal Consumption Expenditures Index (PCE) from 2.6% to 2.8%. While a stronger-than-expected economy and labor market has contributed to inflation’s stubbornness, recent indicators such as weaker Q1 GDP, contracting ISM Manufacturing, and elevated jobless claims imply that economic activity is starting to soften, and inflation may continue to ease. Currently, a 58% chance for the first 25 bps rate cut to occur in September is priced in per the CME FedWatch Tool.
US Economic Data Surprises to Downside
In recent weeks, the Bloomberg US Economic Surprise Index, which measures the degree to which economic data is coming in below or ahead of economic forecasts, hit its lowest level since early 2019. This indicates that economic data has been surprising to the downside as the effects of tight monetary policy have started to materialize.
"Magnificent Seven" to "Magnificent One"
Through mid-June, the top ten largest stocks in the S&P 500 have driven more than 70% of the index’s 2024 YTD return. More interestingly, an outsized portion of this is due to Nvidia’s rally alone. Though each of the “Magnificent Seven” stocks delivered a sizable contribution to the S&P’s 2023 return, will 2024’s performance be mainly determined by Nvidia?
Narrow Breadth
Market breadth has narrowed recently as various macro indicators have weakened and market participants have bid up larger stocks, which are thought to be less vulnerable to economic cycles. This is evidenced by the ratio between the equal and market cap-weighted S&P 500, which currently sits at lows last seen in late 2008.
Growth Scare? Focus on Building a Portfolio that Can Weather the Storm
Markets seem to be experiencing a growth scare, which we believe is validated by tight monetary policy and weaker macro data. Is the bull market over? Not yet, but noticeably, after 15+ months of high interest rates and stubborn inflation, it appears the US economy is starting to slow. We remain constructive, but we think markets are prone to a 10-15% correction, and in fairness, this is within a normal distribution for equities.
Markets have had quite a ride since the October 2023 lows. What made us so constructive in December 2023?
The Fed pivoted and acknowledged that rate cuts were on the horizon for 2024.
The average stock had a valuation that made the risk/reward favorable in our view.
Market sentiment was poor. Recall that "T-bill and Chill" was the mantra for most of 2023.
However, there has been a material change in several of the above-mentioned areas, coupled with a growth slowdown. Therefore, our ETF portfolios required some tweaking. What has changed as of June 2024?
Market cap-weighted index valuations have richened considerably.
Inflation has been stubborn (the Fed hasn’t been able to cut despite 7-8 cuts priced at the start of 2024).
Economic data has softened (i.e., weaker GDP, ISM Manufacturing, Retail Sales, labor market, etc.).
Market breadth has been quite weak.
Front-end rates have been anchored, making equity risk premiums the lowest in 20 years. In short, "T-bill and Chill" remains the mantra. Many advisors seem comfortable hiding in T-bills and nibbling on AI stocks, semiconductors, and other growth cohorts. This has made it painful for broader market participation.
We’ve recently added growth stocks to our portfolios to hedge the risk the economy will continue to materially weaken. The analogy is that large-cap, bellwether stocks can grow their earnings regardless of the macro environment, interest rate levels, or credit cycle.
Rather than trying to determine the timing of Fed rate cuts, advisors should focus on the big picture and build a portfolio that can weather the storm. We prefer to stick with high quality stocks and a globally diversified, multi-asset portfolio that aims to deliver upside while hedging the downside. Markets never go up in a straight line, and bull markets can last longer than one can imagine.
Warranties & Disclaimers
As of the time of this publication, Astoria Portfolio Advisors held positions in SPYG, SPY, SPYV, SPDW, SPMD, SPSM, SPEM, JNK, SPBO, SPAB, MUB, IEF, SPIP, GLD, SLV, USO, BCI, TLT, NVDA, MSFT, META, AAPL, AVGO, AMZN, GOOGL, LLY, and BRK.B on behalf of its clients. There are no warranties implied. Past performance is not indicative of future results. Information presented herein is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. The returns in this report are based on data from frequently used indices and ETFs. This information contained herein has been prepared by Astoria Portfolio Advisors LLC on the basis of publicly available information, internally developed data, and other third-party sources believed to be reliable. Astoria Portfolio Advisors LLC has not sought to independently verify information obtained from public and third-party sources and makes no representations or warranties as to the accuracy, completeness, or reliability of such information. Astoria Portfolio Advisors LLC is a registered investment adviser located in New York. Astoria Portfolio Advisors LLC may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration requirements.