Second Quarter Markets Recap

The powerful rally in stock prices in the first three months abated quite a bit in the second quarter, but generally added to the year-to-date tally. The Dow topped 40,000 last week, and then added 200 points today to reach another all-time high. 

But looking under the hood, you could see some challenges developing.

Stock prices rose via the S&P 500 Index +4.5% in the three months, and now are ahead +14% year to date. The Nasdaq stock index (about 3,000 stocks) ran ahead +9% quarterly, and up +18% in 2024. Here’s the issue: once you move away from the big stock indexes noted above, performance decreases by comparison.

Look at the stock market’s 11 sectors. Just two of them, Technology, +19% and Telecom Services, +17% beat the S&P 500 Index in the second quarter! The other 9 lagged; Energy was +10%, Utilities +9%, Financials and Consumer Staples +8% each, Industrial and Health Care stocks, +7% each, Consumer Discretionary and Materials, +2% each, and Real Estate stocks, down –4.7%.

The large tech and telecom stocks: think Amazon, Nvidea, Google, Apple, Microsoft, Facebook (Meta) have dominated the stock market’s rise this year. Conversely, a full 4 in 10 stocks in the S&P 500 index are DOWN in price for this year through June 30^th!

At some point this will change. Either the big stocks will retreat, or the other market participants will rise and catch up, or both.

Bond prices fell during the second quarter as interest rates traded in a narrow range. The 10-year U.S. Treasury Note bopped up and down in the 3.9% to 4.7% range. The late April high of 4.7% did not last long and April was the only month this year where stock prices fell.

Still, 10-year Treasury bonds lost about 1.2% in the quarter, and is down 3% year-to-date. Shorter maturing bonds were down less. We continue to favor short term U.S. Treasury Bills that mature in 3-6 months. They pay 5.3% annual interest now; the same rate as when 2023 ended. Treasury bills pose no interest rate or price risk as they mature at 100 cents on the dollar, so you always have a positive interest gain.

Gold prices perked up in the last 3 months, adding 4.5% to the +7.5% gain in the January-March stretch. So Gold is right up there with many stock indexes  performance-wide so far this year. Wars, inflation, political uncertainty all favor hard assets like Gold, silver and other commodities.

Gold continued higher even as inflation has abated quite a bit in the latest (June data) report. We recommend at least a 10% ownership in Gold bullion in most all circumstances, and have been since 2011 when Gold was in the $1,500 range. Gold trades near $2,420 today.

It is easy to get too comfortable with stock prices at record highs and your investing assets continuing to grow. There is though mounting evidence of major cracks in our economy; accelerating in the last few months.

Of note: the U.S. personal savings rate has fallen from 5.3% to 3.9% in the last year; Credit card debit balances are now $1.1 Trillion, a near record high; total consumer debt is $17.7 Trillion, a new high and up a whopping 30% since early 2020 when the pandemic started. Our government can keep printing money to pay down old debt; American's have no such option.

Meanwhile, home prices are up 7.2% nationally the past year, if the average American family can even afford to buy one with the current near 7% mortgage rates.

These numbers are not heading in the right direction, folks. Lastly, reported July 9^th, business bankruptcies are up 34% for the first half year vs. the like period of 2023.

So what’s the point of this dichotomy of Wall Street vs. Main Street? It’s to show you that Wall Street’s operations are driven by different catalysts than you and I operate under. Bond Yields, interest rates, computerized trading systems, fear, greed to name a few. Don’t mistake higher stock prices with a great overall economy; they often do not match up.

At some point, the reduced demand for goods and services will affect company profits and thus stock prices negatively, but for now, it appears that the debt and borrowing by individuals and the Central Banks / Federal Reserve are masking these problems. An interest rate cut by the Fed may bring the inflaton / growth pendulum back in a better balance, avoiding a recession. We'll see.

So if you have investments in stocks, bonds and commodities, you are no doubt offsetting some of the risks of your own economy, and your pocketbook that I have mentioned above.

One example, if you owned Gold since the start of 2021, it’s up $512 an ounce, or +25%. Consumer prices are up +20% over the same time-frame. Get my point?

There appears to be some sector rotation starting in the stock market. Technology and Telecom stocks have pulled back a bit, and the laggards like Real Estate and Financial (bank) stocks have sprouted higher.

Maybe a sea change is in the making?

Stay safe out there!

~Barry