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June 2024 Market Commentary

By: Sean T. Corkery, CFA, Chief Investment Officer / 06 Jun 2024
Person with calculator and pen writing notes.

A Big Bounce and a Bold Call for No Rate Cuts

  • Equity markets surged in May, led by Technology and Utility stocks, an odd couple.
  • NVIDIA was a standout top performer, driving a significant percentage of the S&P 500 index's gains.
  • Barron's makes a bold prediction that the Fed will not cut interest rates this year.
  • June was off to a rocky start with the release of a disappointing factory activity report.

 

Index

May 2024

 (%)

YTD

 (%)

1-Year (%)

3-Year Annualized (%)

S&P 500 Index

5.0

11.3

28.1

9.5

Dow Jones Industrial Average

2.6

3.5

19.9

6.0

NASDAQ Composite Index

7.0

11.8

30.3

7.6

Russell 2000 Index

5.0

2.7

20.0

(1.7)

MSCI All Country World Index (ex U.S.)

3.0

6.1

17.3

0.8

MSCI Emerging Markets Index

0.6

3.5

12.7

(5.9)

U.S. Aggregate Bond Index

1.7

(1.6)

1.3

(3.1)

After a tough April, the bond and equity markets bounced back vigorously. The bond market posted its best monthly performance of the year, as medium- and longer-term interest rates declined. 10 of the 11 S&P 500 sectors posted positive results, led by Utilities (up 9%), Technology (up 7%), and Communication Services (up 7%). The lowest-performing sector, Energy, declined less than one percent. Small cap stocks gained 5%, pushing their year-to-date performance into positive territory.

"Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well."

-Warren Buffett

Investors Stayed in May

The Investment Company Institute (ICI) reported an estimated $7.3 billion inflow to domestic equity long-term mutual funds and exchange-traded funds (ETFs) for the week ended May 22, 2024, taking the trailing three-week total to $20.2 billion.[i] This resurrected interest in stocks helped drive the U.S. major equity market indices to all-time highs in May after a lousy April, when investors redeemed $26 billion from these funds. Notably, the Dow Jones Industrial Average, which has served as a key indicator of the broader U.S. economy for over a century, reached the psychological milestone of 40,000 last month, further stoking retail investors' excitement.

But a closer look at fund flows this year yields a startling statistic: 80% of inflows have gushed into Technology stocks. The only other sector with inflows is industrials.[ii]  A graph with blue squares Description automatically generated

NVIDIA's Domination

No one stock seems more popular today than NVIDIA., which designs, develops, and markets graphics processing units (GPUs). GPUs were originally designed to accelerate the rendering of 3D graphics and to enhance visual effects. More recently, GPUs, specifically NVIDIA's GPUs, are powering the Artificial Intelligence revolution. The company's products are being used to train and run large language models, including ChatGPT at data centers around the world.

NVIDIA's growth is breathtaking. The company reported $47.5 billion in data center revenue for its 2024 fiscal year (ending January 28, 2024). Just four years earlier, NVIDIA's data center revenue was $3 billion. For the 2025 fiscal year, analysts expect data center revenue to more than double to $104.5 billion. Earnings growth is remarkable, too, growing at a 50% annualized rate over the last five fiscal years. More incredible, is NVIDIA's stock performance, a staggering 100% annualized return over the last five years, overshadowing a very respectable 16% annualized return from the S&P 500 index.

Tilting the Market

NVIDIA's valuation growth meaningfully impacted the S&P 500 index's performance this year. With a 121% gain year-to-date, NVIDIA alone is responsible for 33% of the S&P 500 index's total return. The market is riding more than one horse, though. The ten largest companies in the index account for 34% of the index's market value and 70% of year-to-date performance. The concentration is at the highest level in decades, according to Goldman Sachs Research.

A graph of blue and black lines Description automatically generated[iii]

Goldman Sachs reports the market has often rallied after bouts of high concentration, dispelling any fear that concentration is a sign of risk. The S&P 500 index generated a 16% annualized return over the past five years, compared with a 30-year annual average of 10%. Nevertheless, the rapid ascent and gap between market valuation concentration and corresponding EPS contribution looks similar to the build up to the dot com bubble. Furthermore, it is worth noting that 36% of the stocks in the index posted negative returns this year. While the major U.S. equities are making all-time highs, many stocks are not participating.

The Next Big Thing

Is NVIDIA's extraordinary run over? It is highly unlikely NVIDIA's shareholders will experience the same returns of the last five years over the next five years. If so, the company would be valued at $92 trillion, slightly less than the current world's gross domestic product value of $105 trillion. The comparison is absurd but relevant. Investors must be mindful of realistic expectations. While we are incredibly early in the Artificial Intelligence revolution, the economic impact is difficult to predict, as are the individual stock winners and losers. Investors discovered many products and services deemed revolutionary during the pandemic, from companies like Peloton, Zoom, Spotify, and Robinhood. Chasing these stocks at their respective peaks resulted in substantial investment losses, from 80% to 95%, as unsustainable growth rates eventually fizzled. Perhaps a better approach to finding the next big thing would be to broaden the opportunity set to include suppliers, competitors, and service providers.

A cartoon of two people Description automatically generated  [iv] 

Why He Won't Cut Rates This Year

Other than NVIDIA, one significant influence on market performance is the now-familiar question of whether and when the Federal Reserve will lower interest rates. This week's Barron's cover story opens with "The Federal Reserve isn't likely to lower interest rates in 2024."[v] Sticky inflation, a resilient economy, and a strong labor market argue against the need to ease monetary policy. Just five months ago, investors expected six interest rate cuts totaling 1.5 percentage points over the next 12 months. Voting members of the Federal Open Market Committee (FOMC) forecasted three quarter-point cuts this year.

As we have discussed in prior commentaries, the Fed operates under a mandate from Congress to promote effectively the goals of maximum employment, stable prices, and moderate interest rates. The Fed's monetary policy hinges on data dependency, with unemployment and inflation metrics serving as the key drivers for interest rate adjustments. In other words, as the economic indicators evolve, the Fed will respond by either raising or lowering interest rates. As the graphic below depicts, inflation deceleration has stalled this year.

A graph of blue and white lines Description automatically generated[vi]

In addition, the cover story shares that the unemployment rate has held below 4% for more than two years, the longest such stretch in more than a half century. The data supports the case for maintaining higher interest rates over an extended period. However, any slowdown in economic activity-potentially triggered by a sudden increase in unemployment or a decline in inflation-could lead to a shift in monetary policy.

 

Looking Ahead

Investors appear unfazed by the changing interest rate outlook this year, likely due to the impressive year-to-date gains in the S&P 500 index and the robust inflow of funds into technology stocks. While recessionary fears have eased, uncertainty remains a constant. June began with a rocky start. The Institute for Supply Management reported that its manufacturing gauge reached a three-month low in May, at 48.7%. Readings less than 50 indicate contraction. Though seven industries reported contracting activity in May, seven reported growth. The varied outcomes might cause investors to hesitate, prompting them to consider the current market's valuation.

 

Amidst the ebb and flow of economic data, geopolitical shifts, and investor sentiment, pockets of opportunities do reveal themselves. Successfully capturing the opportunities requires balancing short-term market fluctuations with an unwavering focus on fundamental factors.

 

We appreciate your confidence and support and encourage you to reach out to an Old Point Wealth Management team member with any questions.

 

 

 

 

[vi] https://www.barrons.com/articles/fed-powell-interest-rate-cuts-projection-69d97a5f?refsec=cover&mod=topics_cover

 

Market Commentary Disclosures

*Magnificent Seven: The term "Magnificent Seven" was coined by others and should not be construed as an endorsement or indicator of any stock or company's quality.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Old Point Wealth Management to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professional, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions as of the date given and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Neither past performance or yields are reliable indicators of current and future results.

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Index Definitions

 

Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted average fo the 30 blue chip stocks that are generally the leaders in their industry. It has been widely followed indicator of the stock market since October 1, 1928.

NASDAQ Composite Index: The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

Russell 2000 Index: The Russell 100 Index is comprised of the smallest 2,000 companies in the Russell 1000 Index, representing approximately 8% of the Russell 3000 total market capitalization. The real-time value is calculated with a base value of 135.00 as of December 31, 1986. The end-of-day value is calculated with a base value of 100.00 as of December 19,1978.

S&P 500 Index: The S&P 500 Index is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of the available market capitalization.

MSCI Emerging Markets Index: The MSCI EM (Emerging Markets) Index is a free-float weighted equity index that captures large and mid-cap representation across Emerging Markets (EM) countries. The index covers approximately 85% of the free float-adjusted market capitalization in the each country.

U.S. Aggregate: The Bloomberg USAgg Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (Agency fixed-rate pass-through), ABS and CMBS (agency and non-agency). (Future Ticker: I00001US)

MSCI ACWI Excluding United States Index: The MSCI AC World ex USA Index is a free-float weighted equity index. It was developed with a base value of 100 as of December 31, 1987.

 

 

 

 

 

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