By: Tony Minopoli, President & CIO of Knights of Columbus Asset Advisors
Well, half of the year is in the bag! The Bloomberg 500 Total Return Index returned 15.1% for the first six months of the year. When looking at styles, the Bloomberg 1000 Growth Index returned 17.6% and the Bloomberg 1000 Value Index returned 6.9% for the first half of the year. Growth stocks continue to dominate, with Nvidia up 149.5% for the first half, along with Microsoft (+19.3%), Apple (+9.7%), Meta (+42.7%) and Google (+30.3%). As valuations continue to rise during this bull market, rebalancing and realizing some of the gains from the growth run-up is certainly a strategy worth considering.
When we consider international equity and small cap, the Bloomberg World ex U.S. Large & Mid Cap Total Return Index returned 5.84% and the Bloomberg Small Cap index returned 0.5% over the first six months of 2024. This year has been a bit like the past few years where large cap U.S. stocks have dominated the stock market and diversification away from growth has been a drag on returns. We remain focused on broadly diversified portfolios because when market sentiment changes, diversification will provide a benefit to cushion portfolios during turbulent times.
The Bloomberg Aggregate Bond Index returned -0.7% for the first half of the year and short-duration bonds fared a bit better with a return of 1.38% for the first six months of 2024. The 10-year Treasury yield ended June at 4.40% versus 3.88% at the start of the year. During this same period, the 5-year Treasury yield ended June at 4.38% versus 3.84%, and the 2-year Treasury ended June at 4.75% versus 4.28% at the start of 2024. The longer-duration bonds were more negatively impacted by the rising rates during this year. Corporate bond spreads remain incredibly tight and the trite saying of “priced for perfection” can certainly be used when discussing the state of credit spreads.
We had the first (and maybe the last) Presidential debate of 2024, and it was fairly unanimous that Donald Trump handily won the debate, and that Joe Biden does not have the same mental acuity he once had. I pondered earlier this year if we would see a contested Democratic convention because of the President’s declining mental ability. A Biden replacement seems even more likely today than it did at the beginning of the year. The President has been “managed” in terms of unscripted press conferences and the ability for him to have to think quickly on his feet. The state of play in the U.S. with “blue” states and “red” states means that just a few states will decide the election because many are so decidedly and reliably Republican or Democrat that their results can practically be predicted today. Further, the only way to win the White House is through the large block of independent voters and they are mulling Biden’s fitness to be President versus character concerns and the recent conviction of Donald Trump. If the polls immediately following the debate are to be believed, it seems that Trump is the presumptive favorite at the moment. More to come, and this could add volatility to the markets as we approach November.
The final print of GDP for the first quarter indicated that the economy grew at 2.9% for the first quarter of this year. Inflation continues to stay above the Fed’s desired 2.0% target, however, at 3.3%, the CPI is cooling. The Personal Consumption Expenditures (PCE) Index, the Fed’s favored inflation gauge, is at 2.6%, so this is showing inflation much closer to the Fed’s target. Employment is providing an uneven picture because the unemployment rate has exceeded 4.0% for the first time in a few years and underemployment has climbed to 7.4%. Job growth has been somewhat muted and wage growth, though off the near-time highs, is still growing at 4.1% annually and accelerated by 0.4% since last month. Essentially, unemployment has risen slightly, but wages are still growing, and this will continue to feed inflation.
Consumers are continuing to spend, and this spending will drive economic growth, but it will also keep inflation from falling to a level where the Fed may feel the ability to cut interest rates by a meaningful amount. When you look beneath the hood on the employment market, tech jobs have fallen by about 500,000, and lower-paid service jobs have grown. This change in the types of jobs growing in the economy will mute economic activity because people hired in leisure and hospitality are not paid the same as the average tech worker.
Economic activity has also been muted with Industrial Production growing just 0.13% year-over-year, but we saw 0.7% growth last month1. Capacity Utilization stood at 78.2% in May, and this increased 0.1% from April. Durable Goods orders increased by 0.1% last month, but they are down 1.2% versus this time last year. Overall, the economy is trying to figure out if there is a growth path with muted inflation or if inflation is high enough that it will weigh on growth, causing either a recession or at least an economic slowdown.
Geopolitics remains very fragile. The war in Ukraine continues and as more countries feed weapons, ammunition, and capital to the Ukrainians, they will maintain their fight with Russia. Russia has been cozier with North Korea because they need weapons and ammunition as well. We continue to watch Chinese activity with respect to Taiwan, and given Biden’s performance during the debate, many wonder if this may embolden the Chinese to finally act against Taiwan.
The wall of worry remains intact, unfortunately!
Until next month.