AI Frenzy Powered Stocks Higher
The excitement surrounding artificial intelligence showed no signs of cooling down during the second quarter of 2024. Investors continued to bet on AI darling Nvidia, which sent the chip maker’s market value above $3 trillion and briefly made it the most valuable company in the world.
According to The Wall Street Journal, Nvidia’s ascent is a big reason the S&P 500 has climbed 14% this year, contributing approximately 30% of the index’s total return. If we include an additional five high performing stocks, ( Microsoft, Apple, Alphabet, Amazon, and Meta)) we find the large capitalization tech giants made up over 60% of the index’s return at quarter end. Truly astonishing!
Outside of large capitalization technology, it was a mixed quarter for financial assets driven by poor earnings performance and relatively high interest rates. This is to say, investors who were highly diversified with unconcentrated positions underperformed the large cap index, as most other asset classes had far more muted returns in comparison.
In one indication of the extent to which big tech stocks have been powering the market, an equal-weighted version of the S&P 500 index is lagging behind the benchmark index by the most in decades. The equal weighted index is up just 4.1% so far this year, underperforming the S&P 500 by 10 percentage points – the biggest gap in the first half of a year in data going back to 1990, according to Dow Jones Market Data.
A rally that is dependent on a handful of stocks is likely to make some investors nervous. With that said, the technology and artificial intelligence themes may have further to run, which means it is probably unwise to fight the dominate market trend at this time.
The path of the economy and financial markets for the remainder of the year is unclear. There has been a contraction in service sector activity, while both the labor market and inflation continue to soften. It is likely the Fed will begin to lower interest rates over the coming months in a process towards policy normalization. While this traditionally has been beneficial to equity markets, nothing about this post-COVID cycle has been normal.
Money market rates out to intermediate maturity treasuries continue to be an attractive option in an investment portfolio context, offering both good yields and potential hedging characteristics.
How The Markets Did Last Quarter?
After a strong start to the first quarter of the year, equity market performance was a bit more mixed over the past three months. Specifically, the S&P 500 was up +4.3%, Russell 2000 Small Cap Index was down -3.3%, Developed International (EAFE) was down -0.2%, and Emerging Markets were up +5.2%.
Fixed income continues to be more challenging and posted mixed results. Similar to last quarter, the short end of the yield curve offered marginally positive returns while intermediate U.S. Treasuries finished down -0.2% and long-term U.S. Treasuries finished down -2.0%, reflecting their greater price sensitivity to changes in interest rates.
The wild card on many investors’ minds is the upcoming presidential election and with it the evolving political uncertainty.
Now, as in the past, I am advising clients to do their best to tune out the noise. Successful long term investors try to keep politics and emotions from affecting their financial decision making. As the election cycle continues to move forward, we can bet the noise will only get louder. Therefore, over the coming months we should all strive to keep calm, carry-on, and stick to the game plan.
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Enclosed are your investment reports for the last quarter. Please feel free to contact me if you would like to discuss our investment strategy for the upcoming quarter. Thank you for your continued trust and confidence.
Sincerely,
Justin Kobe, CFA
Founder, Portfolio Manager & Adviser
Pacificus Capital Management
A referral is the best compliment.
Feel free to forward this email to friends and colleagues.
Sources:
The Wall Street Journal: https://www.wsj.com/market-data?mod=nav_top_subsection
International Indices: https://www.msci.com/real-time-index-data-search
Treasury market rates: http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/
__________________________________________________________________________________Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Cambridge and Pacificus Capital Management are not affiliated.
Material discussed is meant for general illustration and/or informational purposes only, and it is not to be construed as investment, tax, or legal advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice. These are the opinions of Justin Kobe and not necessarily those of Cambridge Investment Research, are for informational purposes only, and should not be construed or acted upon as individualized investment advice.
Investing in the bond market is subject to risks, including market, interest rate, issuer credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies is impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Diversification and asset allocation strategies do not assure profit or protect against loss.
Indices mentioned are unmanaged and cannot be invested into directly. The S&P 500 Index is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. The Russell 2000 Index is a stock market index that measures the performance of the 2,000 smaller companies included in the Russell 3000 Index. The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada. The Index is available for a number of regions, market segments/sizes and covers approximately 85% of the free float-adjusted market capitalization in each of the 21 countries. The MSCI Emerging Markets Index is a market capitalization weighted index comprised of over 800 companies’ representative of the market structure of the emerging countries in Europe, Latin America, Africa, Middle East, and Asia. Prior to January 1, 2002, the returns of the MSCI Emerging Markets Index were presented before application of withholding taxes.
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