Click to View PDF
Week in Review
Equity Markets:
For the eighth week out of the past nine, the S&P 500 ended positive. The S&P 500 has recorded 31 new all-time highs so far in 20241. Despite the market’s concerns about a slowing economy, an overly restrictive Fed, and stick inflation; the S&P 500 has rallied 15.36% year-to-date. The rally so far has been led by a small group of cohorts though. Breadth remains narrow, a measurement by Morgan Stanley shows market breadth at 20%2. This means that only 20% of the individual companies in the S&P 500 are outperforming the broad index. There is a high concentration of outperformance in Mega-Cap Growth. This has only widened the spread of the Russell 1000 Growth and Value Indices. Year-to-date, the Russell 1000 Growth Index has returned 20.49% compared to its value counterpart’s return of 6.85%3.
As we move into the next earnings season, narrow breadth could be a pivotal factor. Currently, analysts are expecting earnings to grow 8.8% from last year4. This is a slight downward revision from the prior week’s estimate of 9%.
Fixed Income Markets:
It was a quiet week in the bond market and the 10-year Treasury Bond traded in a very tight range. It closed the week with a yield of 4.25%, only 0.05% higher than the prior week’s close of 4.2%. Across the yield curve, rates ticked up incrementally. The 2’s/10’s spread remains inverted and closed the week at -0.45%.
With little news on the economic front, there was very little movement in the Fed Fund’s Futures Market. The market is pricing in a 67% probability of the first rate cut occurring in September and a total of 2-3 cuts for the year5.
Economic:
Retail sales missed expectations last week showing only a 0.1% increase in May. Considering that April retail sales declined 0.2%, the fractional growth could be a sign that the consumer could finally be slowing. The Conference Board’s Leading Economic Index fell 0.5% in May. The decline marked the 25th month out of the last 26 the index has fallen. The lone month that did not decline was February 2024, a reading of 0.0% so the index was flat for the month. The monthly decline was the smallest decline since November 2022. The index still indicates slower economic times ahead, but the recent improvement shows the potential slowdown may not be as severe. The housing market continues to cool as higher rates and lack of supply have put a cap on sales. Existing home sales fell 0.7% in May according to the National Association of Realtors.
Looking Ahead
Equity Markets:
At the beginning of the year, we believed valuations and earnings improvements would be the catalyst for a major move in the market. Earnings have improved and come in better than expected, but valuations have continued to climb. Currently, the S&P 500 is trading at 21.6x forward four-quarter earnings6. The narrow breadth will likely put pressure on the market as disappointing earnings from the largest companies would likely lead to a dip at the index level.
Narrow breadth can present opportunities going forward. This would likely require improving economic numbers and continued progress on the inflation front. We view the narrow breadth as a short to intermediate-term risk for the market. To navigate the volatility we expect to see through the end of the year, we believe investors should evaluate their current portfolio to ensure over concentrations do not exist and still align with their strategic allocations which should be constructed to achieve long-term financial goals.
Fixed Income Market
We believe that the bond market will move in a sideways manner staying range-bound through the elections in November. The markets are pricing in a September rate cut, but it would not be surprising to see the Fed not take action until after the election unless there are significant changes in economic growth and/or the labor market.
Economic:
More housing market reports will be released this week. The S&P/Case-Shiller Home Price Index will be released on Tuesday, followed by new home sales on Wednesday, and pending home sales on Thursday. There will be two reports that will provide a timely check-in on the consumer. The Consumer Confidence Index will be released on Tuesday and the final University of Michigan Consumer Sentiment Index will close the week out on Friday. There have been recent signs of the consumer losing strength and these reports are likely to garner more attention than they have recently. The third, and final, reading of first-quarter GDP will be released on Thursday. The Fed’s preferred inflation gauge will be the headline release for the week. The Personal Consumption Expenditures Price Index will be released on Friday. Market participants are forecasting Core PCE to increase by 2.6%, which would be a slight improvement from the previous reading of 2.8%.
Sources:
1)CNBC
https://www.cnbc.com/video/2024/06/18/sp-500-hits-31st-record-close-of-2024.html
2) Morningstar, Inc.
3) JPMorgan Asset Management
4) FactSet Research, Inc.
5) CME Group
https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
6) LSEG I/B/E/S
https://lipperalpha.refinitiv.com/wp-content/uploads/2024/06/TRPR_82221_752.pdf
Important Disclosures:
Investment Advisory Services offered through Krilogy®, an SEC Registered Investment Advisor. Please review all prospectuses and Krilogy’s Form ADV 2A carefully prior to investing. This is neither an offer to sell nor a solicitation of an offer to buy the securities described herein. An offering is made only by a prospectus to individuals who meet minimum suitability requirements.
All expressions of opinion are subject to change. This information is distributed for educational purposes only, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.
Diversification does not eliminate the risk of market loss. Investments involve risk and unless otherwise stated, are not guaranteed. Investors should understand the risks involved of owning investments, including interest rate risk, credit risk and market risk. Investment risks include loss of principal and fluctuating value. There is no guarantee an investing strategy will be successful. 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. The S&P data is provided by Standard & Poor’s Index Services Group.
Services and products offered through Krilogy® are not insured and may lose value. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein.
