Global markets continued their positive, albeit reduced, momentum from the first quarter into the second, with the MSCI All Country World Index climbing another 2.9%. While this return slowdown from the first quarter return of over 8% may seem mundane, market participants around the world have had myriad macroeconomic complexities to think through. Half of the world’s population is voting in elections in 2024, and many of those legislative and presidential elections took place during the second quarter. Investors now need to grapple with how the geopolitical outcomes associated with election results will impact markets, with uncertainty around the US election to linger until November. Major central banks have started to diverge in their monetary policy stances due to varying inflation and economic growth figures worldwide. Additionally, the wars in Israel and Ukraine unfortunately continue to rage on.
The strong year-to-date returns of the US stock market have been driven by the idea that technology companies will play a significant role in the evolution of artificial intelligence. The market returns to date are mostly attributable to a few key leaders in the AI space. As of the middle of June, over 75% of the S&P 500’s YTD return of roughly 14.5% was driven by just ten stocks. Within that subset, chip maker Nvidia had parabolic returns. Since the end of 2022, the stock has climbed almost ninefold, surpassing Microsoft as the largest company in the world by market capitalization. Since 1926, it is only the 12th company to hold the title as the world’s largest publicly traded issue.
At the start of this year, markets expected the Fed would cut interest rates several times throughout 2024. However, with inflation staying elevated above the Fed’s 2% target coupled with robust employment figures, the Fed decided not to cut rates through the first half of the year. Based upon Fed Chairman Jerome Powell’s address to Congress in early July, market pundits are now predicting the first rate cut this year to take place in September, although no definitive statements have been made.
In the housing market, 30-year fixed rate mortgages surpassed the 7% mark mid-quarter but fell slightly to end the quarter just over 6.8%. In May, existing-home sales fell, and median home prices reached a record high according to the NAR’s latest report. The high home prices are in part the result of a shortage of available homes in the US; however, inventory of unsold existing homes grew 6.7% from the previous month to 1.28 million at the end of May. The increase in inventory could potentially lower home prices in the future. In corporate real estate, the office sector vacancy rate reached a staggering 20.1% in the second quarter, while retail vacancy rates held steady at 10.4%.
Oil prices jumped at the beginning of the quarter before settling back to levels close to those at the end of March. Prices at the pump followed a similar trend, jumping initially and eventually cooling down.
SECOND QUARTER EQUITY INDEX RETURNS
In aggregate, global markets provided positive returns despite performance differences regionally. In the US, returns were mostly driven by large cap growth stocks, and value and small cap stocks lagged. International developed large cap securities were slightly negative over the quarter. Emerging markets represented the strongest equity asset class for the quarter.
SECOND QUARTER ALTERNATIVE INDEX RETURNS
In similar fashion to the first quarter, real estate struggled in the second quarter. High vacancy rates in office buildings have plagued the commercial real estate industry. On the contrary, high yield bonds posted a positive return of just over 1%, bringing the year-to-date return to over 2.5%.
SECOND QUARTER FIXED INCOME INDEX RETURNS
US bonds were flat as the US Treasury yield curve increased moderately across the maturity spectrum. US TIPS and municipal bonds posted positive second quarter performance.
As mentioned in the first quarter commentary, there is likely to be a lot of speculation regarding how the upcoming US presidential election will affect markets later this year. It is important to remember that, historically, markets have not performed materially differently under either a Republican or Democratic president. There are many additional factors outside the election that will impact markets, and corporations will adjust their strategies to maximize profits within whatever political environment exists over the next four years.
We hope you all enjoy the end of summer and the transition into fall. We look forward to connecting over the remainder of the year!