June 2024 Market Outlook

After a very disappointing April, the U.S. stock market indices rebounded sharply in May and June thanks to cooling inflation, strong corporate earnings and renewed expectations of a Federal Reserve interest rate cut by the end of the year. The S&P 500 Index and NASDAQ Composite both posted impressive gains due to the continued strength in the technology sector, especially AI-related companies. However, the Dow Jones Industrial Average is ending the quarter relatively flat. After reaching new highs in the middle of May, the Dow has had a volatile quarter due to large selloffs, thanks in part to disappointing management guidance from a handful of bellwether companies. 

Portfolio Highlights 

Though we still like owning U.S. stocks, global economic momentum appears to be improving, while central bank interest rate policy is diverging with the Federal Reserve. However, there are political risks emerging, especially in Europe, so we still favor owning broad U.S. equity indices composed of companies with strong financials, stable earnings, and robust earnings growth.  Federal Reserve rate cut expectations continue to be extremely inflation-data dependent. At least one rate cut is expected by the end of the year, but that might still be too aggressive.  Therefore, we continue to like cash and short-term bonds, while adding duration along the curve, as stocks and bonds are reverting to their historically negative correlation.

Market Review 

Despite a selloff in April, the S&P 500 and NASDAQ both rebounded, posting impressive gains for the second quarter due in large part to continued strong performance by large tech companies. NVIDIA, which executed a 10-for-1 stock split in June, currently has a market cap above $3 trillion, and is the third most valuable company in the world behind Microsoft and Apple. The Dow’s performance disappointed in the second quarter thanks to a major selloff in Salesforce and Disney after disappointing earnings calls, which hinted at lower growth for the second half of the year. McDonald’s stock also faced headwinds as inflation appears to be slowing fast-food purchases. In a telling response, McDonald’s recently introduced a $5 value meal to lure back customers.

Ten-year U.S. Treasury bond yields had another volatile quarter. A hotter-than-expected March CPI inflation print caused yields to spike above 4.70%, their highest level since November 2023. However, a lower-than-expected ISM manufacturing index and signs of a cooling labor market signal that they jump in Q1 inflation might have been an aberration. If these trends continue, many banks expect core PCE to end the year around 2.7%, which is below the Fed’s 2.8% base case, and could fall to 2% next year. Consequently, yields have traded back down around 4.30%, where they started the quarter. 

The Fed 

On June 12, the Federal Reserve Open Market Committee held the Federal Funds Rate target at 5.25%-5.50% and once again revised their interest rate policy expectations out into the future. In the minutes of the meeting, they signaled only one 0.25 bps interest rate cut in 2024, down from 75 bps at the last meeting in March. Fed projections now show 100 bps of cuts in both 2025 and 2026 (each an increase of 25 bps), keeping the cumulative amount of cuts across 2024-2026 unchanged at 225 bps. In his comments after the meeting, Fed Chair Jerome Powell indicated that the Fed would not initiate rate cuts until it was confident that inflation will fall to its stated target of 2% and remain low. Many Fed speakers have also reiterated this need for patience and more data as the second quarter provided a mixed bag in the direction of inflation and the strength of the U.S. economy. As it has done all year, the market is pricing in a more aggressive rate policy with two cuts by the end of year and a roughly 60% probably of the first cut coming in September. 

Given that each investor's risk tolerance and objectives are unique, we encourage you to consult with your financial advisor to assess how this information might affect your overall investment strategy.

For more information, please email us at ir@ballastrock.com should you have an questions.