Q2 Market Review: Tech Giants and Emerging Markets
The second quarter of 2024 saw a continuation of recent market trends, with large technology companies once again taking center stage. The so-called “Magnificent 7” stocks, particularly NVIDIA, Apple, and Amazon, delivered exceptional performance with gains of 36.7%, 22.8%, and 20.7% respectively, as shown in Exhibit 1 below. Their remarkable growth propelled major market indexes to new heights, with the S&P 500 (representing U.S. Large Cap Equities in Exhibit 1) posting a 4.28% gain for the quarter.
While these tech giants soared, other segments of the market, particularly smaller companies, struggled to keep pace. The contrast in performance was stark, with the tech sector’s gains overshadowing the more modest, or even negative, returns seen in other areas.
This divergence wasn’t limited to the U.S. market. On the international stage, we observed varied performance across different regions. International Developed Equities experienced declines of 0.6% over the quarter. In contrast, Emerging Market Equities showed strength, advancing 5% and even outperforming U.S. stocks for the period. These differing outcomes across global markets underscore the importance of maintaining a geographically diverse investment approach.
Even as U.S. big tech stocks dominated headlines, the outperformance of emerging markets demonstrates that opportunities for growth exist beyond domestic borders.
Exhibit 1. Second quarter returns in USD for US stocks, non-US stocks, US bonds, and global bonds, April 2024-June 2024. Fact Set, (2024). Own work.
Economic Outlook: Inflation, Interest Rates, and Employment Trends
On the economic front, inflation and interest rates continue to dominate discussions. In May 2024, the Consumer Price Index (CPI), a key inflation indicator, reached 3.3% – its lowest point since August 2021, yet still above the Federal Reserve’s 2% target. Notably, despite the rising interest rate environment, the job market has shown unexpected resilience, sparking discussions about a potential “soft landing” where inflation cools without triggering a recession.
Over the past several months, the Federal Reserve has been closely monitoring these developments, adopting a more cautious stance on interest rate cuts. Their projections for 2024 rate cuts have been revised downward. At the June policy meeting, Fed officials suggested the possibility of just one rate cut later this year, a significant shift from their December outlook which had projected three cuts. Amid this background, both U.S. and Global Fixed Income experienced flat performance for the quarter, returning 0.07% and 0.12%, respectively, as shown in Exhibit 1.
2024 Election and Your Investment Portfolio
With election season officially upon us, it’s natural to wonder how the upcoming presidential election might impact your investment portfolio. The 2024 election is expected to be contentious, with deep divisions on key issues like the economy, healthcare, climate change, and social policies. These political debates are far from abstract – they strike at the heart of our personal values, shape our identities, and influence our visions for the future, often stirring intense reactions and feelings of frustration, anxiety, or even fear about potential outcomes.
A common question we get during election years is: “How will the outcome affect my investment portfolio?” As the election cycle heats up, markets may experience higher volatility, or increased fluctuations, as investors react to campaign headlines, polling data, and election predictions. With intense media coverage and divisive rhetoric, some investors let speculation or emotions drive investment decisions rather than fundamentals.
Despite the short-term volatility, it’s crucial to remember that predicting market performance over the long term based solely on election outcomes is notoriously difficult. Historical data offers valuable insight. Exhibit 2 below shows annualized S&P 500 performance since 1929 during different presidential terms. The data reveals that markets have generally performed well over four-year presidential terms, regardless of which party holds the presidency. There is no clear correlation between market returns and the party in power.
We use the S&P 500 as the example because it is the index with the longest history of data. This pattern holds true not just for U.S. large-cap stocks, but also for international developed markets, emerging markets, and bond markets.
Disclosure: Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. Actual returns may be lower. Source: S&P data © 2022 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
At the end of the day, individual elections are short-term events. While the emotions and headlines surrounding elections can be challenging, it’s important for investors to maintain a long-term asset allocation and investment strategy aligned with their goals and risk tolerance.
Exhibit 3 below illustrates market resilience across various presidential administrations, tracking the growth of a dollar invested in the S&P 500 since January 1926. This long-term view shows an upward trajectory that transcends political outcomes, demonstrating that markets have generally rewarded patient investors regardless of which party occupies the White House.
Disclosure: Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Source: S&P data © 2023 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
This pattern of long-term growth persists across various market sectors and asset classes, not just the S&P 500. Over extended periods, fundamental economic factors tend to be the primary drivers of returns. These include overall economic growth, corporate earnings, technological advancements, global economic conditions, monetary policy decisions, and demographic shifts. These elements often exert a more significant and lasting impact on market performance than the outcome of any single election, and companies will continue to strive to make profits throughout different political regimes.
This historical perspective serves as a reminder of the importance of maintaining a long-term investment outlook. Despite the natural concerns about how election results might affect portfolios in the near term, the data suggests that investors who remain steadfast through political cycles and short-term volatility often benefit from the market’s long-term growth potential.
Maintaining Perspective: Investment Strategy in an Election Year
As always, the outlook is varied among financial professionals who attempt to predict the future. Beyond the election, some analysts are optimistic about factors like disinflation, potential rate cuts, and AI advancements, while others express concerns about consumer health, unemployment risks, and market concentration.
So what’s the answer?
The straightforward, yet sometimes uncomfortable response, is to avoid making significant changes to your investment strategy based solely on election outcomes. Instead, continue with the investment approach that you and your advisor have determined to be most appropriate for your specific situation. The key is to focus on the factors within your control.
In a complex and ever-changing financial landscape, where unpredictable developments constantly arise, the most crucial advice remains consistent: maintain diversification and adhere to a disciplined, long-term investment strategy. Rather than trying to time the market based on political developments, economic forecasts, or predictions about specific companies or sectors, stick with a well-diversified portfolio that aligns with your personal goals and risk tolerance.
Finally, if you’re feeling nervous, don’t hesitate to reach out to your financial advisor for support – that’s what we’re here for. And don’t forget to vote!
Sources:
“Consumer Price Index Summary.” U.S. Bureau of Labor Statistics. 11 July 2024
Karl Russel. “Fed Keeps Rates Steady and Forecasts Only One Cut This Year.” The New York Times. 12 June 2024.
