A Comprehensive Analysis of the First Half and What Investors Can Expect for the Remainder of the Year
We have hit halftime of 2024, as we enter the second half, let’s review what we have seen and what we can expect for the remainder of the year. In our last newsletter, available at www.paragoncap.com/quarterly-market-insights, we discussed the Magnificent 7 and that we had “started seeing some cracks that are concerning” and followed by “the clear winner was NVDIA up 82.46% as Artificial Intelligence (AI) chips are the favorite theme amongst Wall Street”. This trend continued as NVDIA is now up over 150% year to date, far better than the other Magnificent 7 members. Those 7 stocks (Nvdia, Microsoft, Apple, Amazon, Alphabet, Meta, and Tesla), make up over 33% of the market capitalization of the S&P 500!
When we take a deeper dive into the markets returns this year, the term “Smoke and Mirrors” keeps popping up in our heads. One definition of smoke and mirrors is the intention to make you believe that something is true when it is not. This does not completely relate to the markets, but when you see the S&P 500 is up +15.3% in six months, you might think the whole market is doing great. The S&P 500 has hit 31 new alltime highs this year, which is pretty impressive. However, the Dow Jones Industrial Average is up only 4.8%, small capitalization stocks (represented by the Russell 2000) are only up 1.7%, foreign stocks are up 5.7% and emerging markets are up 7.7%. It is the Nasdaq up 18.6% YTD that is driving the S&P 500. To further illustrate, if we compare the S&P 500 market-cap weighted to the S&P 500 equal weighted it shows a different story:
The gold line in the chart above is the S&P market-cap weighted and the black is the S&P equal weighted. Equal weighted is more in line with the Dow Jones, foreign and emerging market indexes.
According to Goldman Sachs analyst David Kostin, Nvdia, Microsoft, Apple, Google and Amazon accounted for 62% of the equal-weighted S&P 500’s return year-to-date.
Digging a bit deeper, we mentioned above the Magnificent 7 make up 33% of the S&P 500, below is chart showing how the top 10 stocks now make up 37% of the S&P 500:
You can see the performance of the Magnificent 7 compared to the S&P 500 minus those seven stocks as shown below and see dramatic the difference is if you do not own those names.
Looking at the seven names in the magnificent 7, Apple is up less than 9%, Microsoft up around 18%, and the others up 20%-40%, but nothing compared to Nvdia’s 150%, questioning if the market has gone from the magnificent 7 to just 1 driving the returns?
The other major topics dominating the first half the year that will continue into the second half of this year are the Federal Reserve, interest rates and inflation. We lump those all into one topic as they are related to each other for investment purposes. In our last newsletter we stated, “At the beginning of the year the Fed alluded to 3 rate cuts this year, the market wanted 5 or 6 but eventually lowered expectations to 3. Paragon believes that unless inflation slows, we will most likely see only 1 rate cut, and it is very possible that we do not see any this year. Very recently some Fed Governors are lowering expectations to 1 or 0 as well.” We were in the minority stating that we did not expect rate cuts this year and we maintain this position that we will not see any or at the most 1.
Fed interest rate cuts would be great for the stock market as corporate America could borrow money at cheaper rates to buy back stock, acquire other companies and fund growth. However, there is not a huge economic rationale for cutting rates yet and it would seem to make sense to save those tools for when the Fed needs them. For example, the 50-year historical average of unemployment is 6.2%, we are currently at around 4%.
Inflation, can be measured in various ways, regardless of how you measure it, it has decreased. The Fed has stated that they are targeting 2% year-over-year inflation target, however, they have indicated they could cut before hitting 2%.
The Federal Reserve tends to focus on PCE deflator which is at 2.6%. This is much better than the levels were in 2022 but still not at their target rate. We will continue to monitor inflation and where the Fed guides as far as their thinking on interest rate cuts.
Other topics that we are keeping our eyes on for the remainder of the year are the election in November and Money Market balances. Today it is still too early to share any meaningful commentary on the election, there will be lots of news stories, headlines, polls and speculation between now and November. As far as Money Market, there is currently over $6 trillion sitting in Money Market accounts, when that money starts to be reinvested that will have an impactful effect, depending on whether it goes into Equities, Fixed Income, Real Estate or other asset classes.
Whether you feel as if you’ve outgrown your advisor or you just want a fresh perspective on portfolio strategies in our current market, our team of experts is here for you.
