Quarterly Market Review 2024 Q2

Q2 Quarterly Market Snapshot

In the U.S. Q2 was off to a rough start, with high inflation data bringing the U.S. stock market down 5.6% from highs in March. But, the tides shifted quickly as inflation data improved and companies posted strong Q1 earnings, leading to 3.22% gains for the quarter in the U.S. stock market. Artificial intelligence (AI) and tech dominated the headlines and drove much of the growth in the U.S. stock market. Continued signs of easing inflation led to a boost in investor confidence and bonds posted a positive quarter (barely), up 0.07%. Globally, growth stocks were the top performing asset class, delivering 6.4% over the quarter. International markets struggled with political uncertainty, ending the quarter down 0.6%, while emerging markets, led by China and Taiwan, were up 5%.In fixed income, core inflation in the U.S. fell slightly, but remained above 3%. The Fed held the Federal Funds rate steady through June at 5.25%, the highest level in more than two decades, in a continued effort to cool persistently high inflation. Central banks in Europe and Canada, however, cut interest rates in Q2.A few interesting data points:

• The U.S. stock market was up 3.2% in Q2.

• U.S. stocks are up 23.78% over the past 12 months.

• The tech-heavy Nasdaq, after gaining 44.6% last year, has risen 18.1% this year, while the S&P 500 is up 14.6% year-to-date.

• Core inflation fell slightly but remained above 3% in the U.S.; the Fed kept rates steady, while central banks in Europe and Canada cut interest rates.

• The Federal Reserve has kept the Federal Funds rate unchanged so far in 2024, with markets pricing in an 85% probability of a rate cut in September. Current rates are still at 5.25%-5.5%.

• The yield curve remains inverted, meaning the 2-year Treasury yield is still higher than the 10-year Treasury yield. This is not a normal, long-term status, so we do expect this to change in the future.

Below is a snapshot of key top-line economic indicators:

U.S. Stocks

The second quarter started with a 5.6% decline in early April, but after a strong jobs report mid-April, the U.S. stock market saw steady gains for the remainder of the quarter, ending up 3.2%.

It was another quarter of big tech dominance, with the sector up 11.4% in Q2. AI computing giant NVIDIA alone accounted for 1.6 percentage points of the entire market’s Q2 return. The company saw 36.7% returns over the quarter and is up 200% over the past year. Another noteworthy mention is Alphabet (GOOGL/GOOG) paid its first-ever dividend payment to shareholders in April, joining Meta Platforms (META) and Salesforce (CRM) in the emergence of tech stocks paying dividends. Our portfolios hold all of these rapidly growing companies, and they are top holdings in the funds we use. Communications was not too far behind tech, up 9.16%, and utilities were up 4.5%. Energy and real estate posted negative returns.

International Stocks

Developed markets were slightly negative at -0.6% in Q2. While large cap stocks saw gains, overall returns were heavily impacted by the political environment. In June, the European Central Bank (ECB) cut interest rates, for the first time since 2019 but the higher interest rate environment still stifled growth in small cap and real estate. The effects of the rate cut were overshadowed, however, by the European parliamentary elections and subsequent snap elections in France. The French stock market dropped 6.4% in June, bringing down international market returns. Concerns about the possible outcomes and fallout in France caused further market volatility and negative returns for the quarter. In the U.K., hopes for a June rate cut did not come to fruition, with sticky inflation pushing out expectations to a possible cut in August.

Emerging markets were up 5% in Q2. China and Taiwan led the way, with Asian markets (excluding Japan) up 7.3%. China’s stock market benefited from government support for real estate, and AI-heavy Taiwanese stocks were boosted along with the global AI wave. In Mexico, the stock market was down 15% for the quarter following the election of Claudia Sheinbaum as president, over concerns of upcoming policies that could hamper business.

Fixed Income

Despite a bumpy quarter in the bond market, bonds barely eked out positive returns, with signs that inflation continues to improve. U.S. Treasuries were little changed for the year, with the 10-year Treasury bond falling 1.0%. However, yields (which rise when prices fall) remained higher than they have been for most of the past decade.

U.S. core inflation (a measure of the change in cost of goods and services, excluding food and energy) was 3.4% in May, a multi-year low, but still above the Fed’s 2% target. However, it continues to move lower, which is the direction policymakers want to see it go. Interest rates have stayed at a target range of 5.25%-5.5% for two years now. Investors have been eagerly awaiting rate cuts, but expectations for when and how many continue to get pushed out. For now, the market is anticipating a possible 0.25% rate cut in September. 

The yield curve (measured as the difference between 2-year Treasury yields and 10-year Treasury yields) has now officially been inverted for two years. An inverted yield curve means that the market expects economic and inflationary activity to decrease in the future.