Markets in a Minute: Q2 Market Commentary and Outlook

Market Review

After posting enviable returns in Q1, the S&P 500 index marked new highs in the second quarter, gaining about 5% for the quarter and 15% for the year to date. Gains came despite Federal Reserve officials delaying interest rate cuts. The technology sector played a significant role in the stock rally, contributing half of the index’s year-to-date earnings growth.

Outside the US, emerging market equities returned 7.5% while developed market equities (excluding the US) returned 5%. The bond market struggled as persistent inflation delayed interest rate cuts, which in turn supported commodity prices. Real estate continued to underperform as investors came to grips with higher for longer rates in a highly levered, interest-rate-sensitive sector.

Year-to-Date Returns, %

Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and not subject to fees. It is not possible to invest
directly in an index. Note:views are from a U.S. dollar perspective. This material represents an assessment of the market environment at a specific time and is not
intended to be a forecast or guarantee of future results. Source: Kestra Investment Management with data from FactSet. Index proxies: Bloomberg U.S. AGG Bond Index, ICE BofA U.S. Corporate, ICE BofA U.S. High Yield, S&P 500, MSCI EM, MSCI World ex US Index, Dow Jones U.S. Select REIT, and Bloomberg Commodity Index. Data as of June 28, 2024. 

The Economy

Economic data has been mixed but generally strong. The US added a solid 206,000 jobs in June, however the unemployment rate grew to over 4% for the first time since November 2021, showing signs that the job market is slowing down. Leading indicators for employment, such as small business hiring plans, suggest more weakness ahead.

Consumers are also showing signs of moderate strain. In addition to the much-discussed increased credit card delinquencies, personal savings rates and the level of personal savings are well below pre-pandemic levels. In addition, real retail sales growth (excluding autos) has been flat to negative since November 2022. 

Nominal versus Real Retail Sales excluding Autos

Source: Kestra Investment Management, FRED. Data from January 1, 1993 through May 1,2024.

This has fed through to companies such as Nike, which experienced its largest single day stock drop in its history. Fast-food chains such as McDonalds, Burger King, and Starbucks have promoted affordability through price promotions as inflation-weary Americans trade down to eat at home. Consumer sentiment has also been at or below levels typically seen during recessions for much of the past two years, despite inflation having abated significantly. 

University of Michigan Index of Consumer Sentiment

Source: Kestra Investment Management with data from FRED. Data from January 1978 – May 2024

Despite a slowing in overall economic growth, consumer balance sheets remain strong. For example, consumers are less leveraged than ever going back to 1987 as measured by total debt as a percentage of net worth. Additionally, household debt payments as a percentage of disposable income remain below average going back
to 1980’s and are slightly below pre-pandemic levels.

Household Debt Service Payments as % of Income (Left)

Household Debt as % of Net Worth (Right)

Source: Kestra Investment Management, with data from FRED. Debt service data from January 1980 – October 2023. Household debt as % of net worth data from October 1987 – January 2024

Looking Ahead

For the economy, all eyes will remain on inflation and the labor market. While price increases have decelerated, broad inflation measures still remain above the Federal Reserve’s comfort level. Of particular concern has been a very tight labor market where a shortage of workers has driven wages higher, fueling inflation. Provided we get additional data that inflation is abating and wage growth is cooling, the Fed could cut rates for the first time this cycle by September.

In the meantime, the November presidential election will also loom large. Given the political uncertainty, we would expect volatility in the market to begin to kick up in late summer and early fall.

That said, investors would do their portfolios a favor to remember that the market typically performs similarly during both election and non-election years.

Until next time, invest wisely and live richly.

Kara Murphy