2024 Mid-Year Stock Market Update
The Fed, AI, and a Narrow Market
July 2024
We are halfway through 2024. So far, results for equity markets have been mixed and the lead stories have been the Federal Reserve, artificial intelligence (AI) and “narrow” returns. Many large cap technology leaders have produced stellar returns while other areas of the market have languished a bit. The S&P 500® Index is up an impressive 15.3% while the Dow Jones Industrial Average® Index is well behind with a 4.8% gain and the small cap-oriented Russell 2000® Index is up only 1.7%. What’s more, “growth stocks” have outperformed “value” stocks by an extraordinary margin of 14.1 percentage points. The Russell 1000 Growth® Index is up 20.7% while the Russell 1000 Value® Index is up 6.6%.
“FedWatch” is in full force. Investors continue to anxiously follow Federal Reserve commentary with hopes that more accommodative policy (i.e. lower interest rates) will support the economy and stocks. Expectations for rate cuts were too optimistic as we started the year and were quickly subdued by stubbornly high inflation data. More recently, however, tamer inflation data and evidence of decelerating economic growth have brought potential rate cuts back into play. Indeed, consumer spending across many areas seems to be slowing as excess savings from the pandemic era has largely been exhausted.
Then there’s artificial intelligence (AI), which continues to captivate investors with the promise of significant innovation and value creation. The allure of AI has only been exacerbated by slowing growth elsewhere in the economy. Put differently, investors seem even more willing to pay a premium for growth as it is becoming scarcer, and have become more complacent about holding stocks with recent outsized gains. In fact, it sometimes feels as though we have two stock markets – the AI market and the “everything else” market. While leading AI plays continue to post astounding growth and attract investors’ dollars, many other areas are struggling with post pandemic hangovers that could persist for a bit. Numerous industries (especially consumer facing businesses) that experienced spending booms have entered a period of normalization that entails slowing growth.
Consequently, market returns have dramatically narrowed. That is, gains have largely come from a handful of stocks. Within the S&P, the Information Technology sector has generated a whopping 28.2% return while the other sectors have averaged 8.9%. More cyclical areas like Consumer Discretionary and Materials are up 5.7% and 4.0%, respectively. Concurrent with more narrow returns, the S&P 500 has become increasingly concentrated. The top 10 names in the S&P are dominated by AI-related stories and now account for 37.0% of the index, which is the highest level of concentration since 1963 according to FactSet. The threesome of Nvidia (NVDA), Apple (AAPL) and Microsoft (MSFT) now account for 20.5% of the S&P 500 and have contributed 42.4% of the index’s YTD gains. NVDA alone is up an astonishing 149.5% this year as it has become the official AI darling. Incredibly, NVDA’s market capitalization surpassed $3 trillion in the quarter just a few months after reaching $2 trillion.
Investors’ focus on relatively few things has sucked the life out of many other areas of the market, including value and small cap stocks. It has also created a conundrum for money managers benchmarked to the S&P 500. Striving solely to keep up with this particular benchmark would have necessitated holding a full helping of the aforementioned tech behemoths, while surpassing the S&P would have required seconds! We certainly understand the appeal of these stocks and own many of the AI leaders where appropriate (primarily in our Core Leaders strategy), but feel holding such massive weightings would entail taking on too much risk regardless of the promise of this new technology. This is especially true following the meteoric runs that many of these leaders have experienced. At the risk of sounding like we are whining or making excuses, we argue that diversification and risk management still matter.
From here, it seems to make sense for the market to become less bifurcated. We would not be surprised to see some of the biggest winners cool off a bit. Along those lines, we think gains could broaden to other areas of the market that have been more neglected. It’s difficult to time when this will happen, and our thesis assumes Fed policy will start to ease and support the economy. However, we are willing to be patient and don’t feel pressured to pander to recent market trends. Please refer to our strategy letters for specific ideas and we look forward to reporting back to you in three months.
Sincerely,
George L. Smith III, CFA®
Chairman, Investment Policy Committee
| Market Returns | Q2 2024 | YTD |
| U.S. Large Caps | 4.3 | 15.3 |
| U.S. Mid Caps | -3.4 | 5.0 |
| U.S. Small Caps | -3.3 | 1.7 |
| International Developed Markets | -0.4 | 5.3 |
| Emerging Markets | 5.0 | 7.5 |
| Intermediate Term Bonds | 0.6 | 0.5 |
Securities and Advisory Services offered through Davenport & Company LLC Member: NYSE | FINRA | SIPC
Important Disclosures
Diversification and Asset Allocation does not ensure a profit or guarantee protection against a loss. Any opinions expressed here are statements of judgment on this date and are subject to future change without notice. This information may contain forward looking predictions that are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. There is no guarantee that a company will continue to pay a dividend. The investment return and principal value of an investment will fluctuate. Small and mid cap company stocks may be more volatile than stocks of larger, more established companies. The portfolios may invest in foreign securities which are subject to additional risks such as currency fluctuations, political instability, differing financial standards and the potential for illiquid markets. The information provided in this letter should not be considered a recommendation to purchase or sell any particular security.
Performance shown is historical and is no guarantee of future results. Investing in securities carries risk including the possible loss of principal.
Data as of 6/30/2024 ©2024 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) maynot be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.
Index Definitions: U.S. Large Caps represented by the S&P 500 Index. U.S. Mid Caps represented by the Russell Midcap® Index. U.S. Small Caps represented by the Russell 2000® Index. International Developed Markets represented by the MSCI EAFE Index. Emerging Markets represented by the MSCI EM Index. Intermediate Term Bonds represented by the Bloomberg Intermediate Government/Credit Index.
The S&P 500 Index is comprised of 500 U.S. stocks and is an indicator of the performance of the overall U.S. stock market. Standard & Poor’s Financial Services LLC, a division of S&P Global, is the source and owner of the registered trademarks related to the S&P 500 Index. The Russell 2000 Index measures the performance of the 2000 smallest companies in the Russell 3000® Index, representing approximately 8% of the total market capitalization of the Russell 3000. The Russell 1000 Value Index measures the performance of the Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values. The Russell 1000 Growth Index measures s the performance of the Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values The Russell Midcap Index measures the performance of the 800 smallest companies in the Russell 1000®, which represent approximately 25% of the total market capitalization of the Russell 1000. London Stock Exchange Group PLC and its group undertakings (collectively, the “LSE Group”). © LSE Group 2024. FTSE Russell is a trading name of certain LSE Group companies. “Russell®” is a trade mark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote/sponsor/endorse the content of this communication. The Morgan Stanley Capital International Europe, Australia and Far East (MSCI EAFE) Index is an unmanaged index composed of the stocks of approximately 1,000 companies traded on 20 stock exchanges from around the world, excluding the U.S., Canada, and Latin America. The Morgan Stanley Capital International Emerging Markets (MSCI EM) Index is a capitalization-weighted index of stocks from 26 emerging markets that only includes issues that may be traded by foreign investors. The reported returns reflect equities priced in US dollars and do not include the effects of reinvested dividends. The Bloomberg Intermediate Government/Credit Index is an unmanaged index composed of debt securities with maturities from one to ten years issued or guaranteed by the U.S. Treasury, U.S. Government agencies, quasi-federal corporations and fixed rate dollar denominated SEC-registered corporate debt that are rated investment grade or higher by Moody’s Investors Service and Standard and Poor’s Corporation or Fitch Investor’s Service, in that order. The Dow Jones Industrial Average (DJIA) is a stock market index that tracks 30 large, publicly-owned blue-chip companies trading on the New York Stock Exchange (NYSE) and Nasdaq.
An investor cannot invest in these indices and their returns are not indicative of the performance of any specific investment.
© 2024 Davenport & Company LLC – All Rights Reserved.