In this latest installment of our newsletter, we share our observations of the markets and the economy in the second quarter of 2024. Click here to go to the full report on our website. Following are the highlights:
- The stock market carried its strong momentum that began in late 2023 into the second quarter of 2024, driving most equity market indices to record highs. The S&P 500 Index alone set more than thirty new 52-week highs in the second quarter, one of the highest numbers ever recorded in a single quarter.
- The S&P 500 index posted a 4.3% total return in the second quarter, putting its total return for the first half of the year at 15.3%. This marks the second year in a row that the S&P 500 has notched double-digit gains in the first six months of the year.
- Both the S&P 500 and the Dow Industrial average hit new benchmark levels during the quarter, with the S&P topping 5,500 and the Dow surpassing 40,000 for the first time ever, only to retreat slightly at quarter-end.
- The bond market, as measured by the Bloomberg Barclays Aggregate Bond Index, reversed losses from the first quarter to post a slightly positive 0.1% total return in Q2 2024. For the year, however, the bond market remained in negative territory, returning negative 0.7% in the first six months of 2024.
- Bolstered by the combination of a resilient U.S. economy, solid corporate earnings and GDP growth, and continued strong momentum in the technology sector, the market rally that started in late 2023 has forged ahead in 2024.
- As expected, the Federal Reserve held its benchmark fed funds rate steady at 5.25% – 5.5% at its June meeting, continuing a pause in interest rate activity that began in mid-2023. The Fed also signaled just one 25 basis point cut (one-quarter of 1%) in late 2024, though some members believe that two 25 basis point cuts are still possible.
- Inflation continued to cool, with the Consumer Price Index, or CPI, rising 3.0% for the twelve months ending in June 2024, below the consensus estimate of 3.1% and lower than the 3.3% rate in May. The overall decline in the costs of consumer goods and services in June marked the first such monthly decline since the start of the pandemic in 2020.
- Corporate earnings have remained solid and are projected to accelerate in the latter half of 2024 and into 2025. For Q2 2024, the estimated year-over-year earnings growth rate for the S&P 500 is 8.8% which, if true, would be the largest quarterly growth rate since Q1 2022. For the full-year 2024, S&P 500 corporate earnings are projected to grow 11.3% year-over-year, accelerating to 14.4% for FY2025.
- There have been signs that the U.S. economy is slowing. U.S. GDP slowed to 1.4% in the first quarter of 2024, down from 3.4% in the last quarter of 2023. But that slowdown may have been short-lived, as the latest GDPNow model by the Fed projects second quarter GDP growth to rebound to 2.0%.
- U.S. unemployment ticked up in June to 4.1%, compared to 4.0% in May and 3.6% a year earlier. The number of unemployed Americans grew 11% year-over-year to 6.8 million. Weekly jobless claims also grew more than expected in early June, pushing claims up to a ten-month high.
- Housing starts fell 5.5% in May, their lowest level since June 2020. The positive momentum in the housing market from earlier in the year was slowed by a surge in mortgage rates, which hit a six-month high of 7.2% in early May. Confidence among homebuilders also hit a six-month low in June, with the National Association of Homebuilders stating that persistently high mortgage rates are keeping many prospective homebuyers on the sidelines.
- There are numerous geo-political risks around the world that, if they intensify, could have negative impacts on the global economy. These include the conflicts in the Middle East, tensions between China and its neighbors, and the ongoing war between Ukraine and Russia. Any of these conflicts could expand and have broad implications for global energy prices, trade relations, and world economies.
- And of course, there is the U.S. Presidential election in November. While there is much angst and uncertainty surrounding this election, what we know from history is that it is not likely to have a long-term impact on the markets.
- Our outlook for the economy and markets in 2024 remains cautiously optimistic. While the U.S. economy could slow in the nearterm, our long-term outlook is for the economy to grow at a solid pace and for corporate earnings to continue to rise, both of which should be positive for long-term stock returns. Other positive factors could include the resolution of geo-political conflicts, an economic recovery in China, and inflation and interest rates in the U.S. easing faster than expected, all of which would provide additional tailwinds for stocks. Finally, the continued adoption of artificial intelligence across numerous industries and applications is expected to drive long-term growth and productivity in the U.S. economy.
- With respect to valuation, the broad S&P 500 index can be considered fully valued at approximately 21 times forward 12-month earnings, slightly above its 5-year average of nearly 19 times. However, not all stocks or sectors are fully valued, as there is a wide dispersion of valuation multiples across sectors and companies. We continue to look for and find pockets of opportunity, particularly in sectors which have lagged the overall market and are thus more attractively priced.
- We expect value-oriented stocks, dividend-paying stocks, and other income-oriented securities to benefit from a broadening market rally and potentially lower interest rates in the future. In the meantime, we still find short-term Treasury bills and high-yielding money market funds attractive places to park cash at risk-free annualized yields around 5%.
- Overall, we maintain a positive long-term outlook for the U.S. economy and markets, and we believe our patient, disciplined approach to individual security selection offers our clients strong long-term return potential in a cost effective and tax efficient manner.
The Edgemoor Team
July 2024
