Second Quarter 2024 Market and Economic Review

It may sound a bit like a broken record, but the primary forces driving our domestic economy and market responses continue to be inflation and interest rates, which the Federal Reserve continues to hold steady to subdue the lingering inflation. Stay with us, though, as there are some nuances to the economic environment that are worth understanding.

By most measures, the U.S. economy continues to be strong. With relatively few notable dips, each major index has shown steady growth throughout the year. Also, job growth has been good even though the unemployment rate has seen incremental increases and reached the 4.0 percent mark in June, a first for the unemployment rate since January 2022. These conditions are partly why the inflation rate continues to linger above 3.0 percent year-over-year (latest data shows 3.3 percent for the 12 months ending in May). It’s also why the Fed has held steady with its prime interest rate and been coy with projections on when cuts to the rate may be realized.

From a high level, these factors would lead most to believe that our economy is quite strong. While that may be true in many respects, there is some fragility that needs to be considered for investors. For starters, the S&P 500 is highly skewed by a small handful of stocks, as we’ve discussed before. To give that reality some perspective, consider this. In May, Nvidia’s market valuation grew from around $2.3 trillion to about $3.3 trillion, a gain that temporarily put the stock at the very top of the leaderboard ahead of Microsoft and Apple. At that valuation, Nvidia’s market capitalization was greater than the combined market cap for all of France, as well as Germany’s combined market, and the U.K.’s combined market.

Since then, Nvidia has dropped back slightly, and Microsoft reclaimed the top position by the end of June. Microsoft, Apple, and Nvidia each had valuations above $3T, making each of them more valuable than the combined valuations of the bottom 400 companies in the S&P 500. That’s significant because small changes by any of them can disguise what’s happening throughout the index beyond the top 10 or 15 companies.

Elections are another component impacting the economic environment, and not just in the U.S. 2024 is a big year for elections around the world, with roughly half of the world’s voting population heading to the polls at some point this year. Here at home, Presidential election years historically present some wait-and-see mentality among investors. The hesitation isn’t based on a fear of one side winning over the other but on trying to calculate how to weight their investments based on the expected policies for each candidate.

Should Trump win, for instance, companies with exposure to international sales could very well see some drawbacks since he has shown a willingness to impose tariffs on foreign goods. However, those dollars would likely shift towards American-based companies.

Similarly, if Biden wins, the large technology companies may experience some pullback in response to his administration’s efforts to tax big business. Instead, those investments might shift towards companies with pro-environmental strategies.

At the end of it all, our investment strategies will be less concerned about the overall market health being determined by a specific winner and more focused on what market sectors will be impacted by key policies – whether positively or negatively – and adjusting accordingly.

Global Overview

Much of Europe experienced slightly better improvement on the economic front, at least percentage-wise. By the late second quarter, most of Europe had seen notable drops in inflation, and the European Central Bank responded with a modest 25-basis-point drop in its interest rate. The territory is still experiencing tight energy markets caused by the Russia-Ukraine war. Constricted shipping routes through the Red Sea caused by Houthi's response to the Israel-Palestine war are hampering some of Europe's supply chain.

On the election front, an unexpected shift towards conservative ideals in countries like France, Germany, and India has resulted in economists and investors pressing pause to see where the dust settles.
China’s economy also showed signs of recovery through the second quarter thanks to a combination of domestic consumption and government stimulus measures. Looming debt in China’s property sector and regulatory crackdowns on technology companies are the primary areas of concern for investors.

Looking Ahead

For the next quarter, and likely through the November election, expect similar economic growth and improvements in inflation. Eventually, drops in the Fed’s interest rate are expected, but timing is certainly tied to the steady improvement of the inflation rate. Once the election results are known, expect some market volatility as investors sort out the sectors most likely impacted by the next administration’s policies. Regardless of the outcome, one thing Slaughter Associates will not do is run to one side of the boat or the other based on the winner. Maintaining a balanced portfolio that keeps long-term goals as a north star will continue to be our approach for each of our clients.