June 2024 - Market Update

The Friedenthal Team

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Key Observations

S&P 500 index rose by 3.59% in June. Utilities was the worst performing sector, after being the best performer two months in a row. The best performing sector was Technology, which rallied 7.84% for the month.

The Fed's preferred gauge for inflation (PCE) came in at 0.1% MoM and 2.6% YoY, both of which presented evidence of the economy slowing & boosted expectations for a September rate cut.

Fed chair Jerome Powell acknowledged that “We’ve made a lot of progress” in the fight against inflation, but reiterated that it was too soon to comment on rate cuts by the end of summer.

Treasury yields on govt bonds continued to fall, resulting in almost a 1% rise in the US Aggregate Bonds Index.

Data Dashboard

*Data Source: Bloomberg. As of 6/30/2024*

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Stock Market

All three major US indices, the Dow, S&P500 and Nasdaq gained in June.

Wall street darling, Nvidia underwent a 10-for-1 stock split on June 7, and rose to all-time highs, briefly becoming the most valuable company in the world, before pulling back. AI bulls are watching this stock very closely, as it has singlehandedly contributed to 30% of the S&P500 returns this year.

Walgreens shares tumbled after reporting its Q3 earnings & the stock has been the worst performer of 2024, with shares down almost 53% since the beginning of 2024.

The CBOE Volatility index is at 12.99, indicating a fairly bullish market sentiment. The latest revision to Q1 2024 GDP growth came in at an annualized rate of 1.4%, the slowest pace in almost 2 years. While stocks generally are sensitive to the growth rate of the economy, we have seen a surprising resilience in mega-cap stocks.

At the end of the 1st half of 2024, the S&P 500 market-cap weighted index is up 15.29%, while the equal weighted index is only up 3.5%. Incl. Nvidia, big tech & Amazon has contributed to almost 70% of the performance of the S&P500.

June Monthly Returns (by US Sector)

Bond Market

The European Central Bank (ECB) decided to lower interest rates by 25 basis points. US Economic data releases for June, mainly unemployment & inflation numbers, further supported the expectation of a September rate cut by the Fed. Both of these contributed to the US & Global aggregate bond indexes rise by 0.95% & 0.14%.

The yield curve still remains inverted with the 10Y US Treasury yield at 4.47%. High yield corporate bond spreads rose slightly to 3.7%, but still indicate a low implied risk of default. These bonds can see more significant drawdowns when the stock market is volatile. It is important to not over-allocate a bond portfolio to high yield bonds when the goal is to create a low-volatility basket.

Since the Fed went on its rate-hike spree in 2022, bonds have performed very poorly. But the anticipation of rate cuts in the near future, and positive economic data supporting that narrative, has had a positive effect on bonds. Although the market expects at least one cut before the end of the year, its extremely unlikely that rates would go down to pre-Covid levels, anytime in the next few years.

Economics

The Fed kept the charge rate at 5.25% -5.5% at its June FOMC meeting. The June 12th CPI YoY reading came in at 3.4%, showing a consistent trend of lowering inflation.

The ISM Purchasing Manager's Index (PMI) came in at 48.5 for the June period, lower than a consensus of 49.1. PMI measures the expansion of the manufacturing segment of the economy & is a key economic indicator. Historically, investors anticipate a reading above 50 as bullish sign. However, in today’s high-rate environment, this might actually be a good sign as the Fed looks for a slowing economy to implement rate cuts.

US unemployment rose to 4%, suggesting a slow, contained cooling in the labor market.

The overnight average of 30-year fixed mortgage rate rose to 7.26% down from 7.35% in June. The housing market continues to remain resilient given the low level of supply. Existing home sales fell slightly in May and stood at a Seasonally Adjusted Annual Rate (SAAR) of 4.11 million. The release for June is expected to come out on July 23rd.

In a nutshell, the US economy is holding strong despite high costs of borrowing, but indicators are pointing towards cooling goods & services inflation.

June Economic Dashboard

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Tactical Trades

In our tactical stock portfolio, we are overweight in IT and underweight in Real Estate & Consumer staples.

Our Tactical ETF portfolio now includes exposure to European Financial stocks & Taiwan, having replaced our positions in Communications & Homebuilders.

Our Japan holdings actually rose, despite the Yen falling almost 3.3% against the USD in June, due to the currency hedged nature of our holdings.

For the Fixed Income portfolio, we are weighing more on low duration bonds, taking advantage of higher short-term yields, with lower sensitivity to interest rate spikes.

Wish you a very happy Independence Day!

As always, reach out with any questions or concerns.

Thanks,

The Friedenthal Financial Team

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