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The Quick Facts

• Powered by mega-cap outperformance, U.S. large-cap equities led the world with the S&P 500 up 3.6% in June, 4.6% quarter-to-date (QTD), and 15.3% year-to-date (YTD).
• The S&P 500 recorded 31 all-time highs in 1H 2024.
• The equal-weight version of the S&P 500 trailed the market cap-weighted one by 10.3% YTD.
• Growth significantly outperformed value yet again, with the Russell 1000 Growth up 6.7% in June (+20.7% YTD) vs. -0.9% for the Russell 1000 Value (+6.6% YTD).
• Technology and Consumer Discretionary were the top-performing sectors in June, up 7.8% and 3.9%, respectively. YTD, all sectors are up (with Communication Services leading at +18.5%) except for Real Estate, down -2.5%.
• Federal Reserve (Fed) fund futures have now priced in a two-third probability of at least one rate cut at the September meeting.

Powered by mega-cap outperformance, U.S. large-cap equities broke new all-time highs, with the S&P 500 up 3.6% in June and 15.3% YTD. According to data compiled by Bloomberg, the S&P 500 has notched 31 all-time closing highs in the first half of 2024. Only one other year – 2021 – surpassed it this century. Small caps did not perform as well as their large-cap peers, with the Russell 2000 index down 0.9% for June and up a meager 1.7% YTD.

Thanks to AI-related optimism, markets are dismissing inflation concerns and uncertainty over the timing of potential Fed rate cuts. For instance, AI chipmaker Nvidia contributed the most to the S&P 500’s rally, with a 150% total return in 1H 2024. The equal-weight version of the S&P 500, which makes no distinction between the market capitalization of the 500 companies in the index, has trailed the market-cap weighted version by 10.3% YTD. That is the widest ever underperformance in the first six months of the year.

Markets continue to have no problem with higher for longer rates, geopolitical issues, and the pending U.S. election. Are higher long-term interest rates putting pressure on earnings? We will get some answers in the coming weeks as the second-quarter earnings season is approaching, with bullish expectations priced in.

June Asset Class Performance

Growth significantly outperformed value yet again, with the Russell 1000 Growth up 6.7% in June (+20.7% YTD) vs. -0.9% for the Russell 1000 Value (+6.6% YTD). Over the last three years, the total return of the Large-cap Value index has lagged the total return of the Large-cap Growth Index by 20.4%. The Russell 2000 Index – the world’s most closely followed gauge of smaller companies – was down 0.9% in June and up 1.7% YTD, reflecting the vulnerability of small companies to higher interest rates. The ESG segment of the market, as measured by the MSCI USA ESG Select Index, was up 3.1% in June, 0.5% less than the S&P 500. Over the last three years, the ESG index is up 23.2% and 9.8% behind the S&P 500 on a total return basis. Emerging markets equities outperformed in June, with a +3.9% total return. They remain behind U.S. equity returns YTD (+7.5%), over the last 12 months (+12.4%), and over the last 3 years (-14.4%). The EAFE (Europe, Australasia, and the Far East) equity index was dragged down in June by French stocks taking a beating on election worries. The index was down 1.6% in June and is now up just 5.8% YTD, behind U.S. and emerging market returns for equities.

Technology and Consumer Discretionary were the top-performing sectors in June, up 7.8% and 3.9%, respectively. YTD, all sectors are up (with Communication Services leading at +18.5%) except for one. Real Estate is the only sector with losses in 2024 (-2.5% YTD), posting its worst first half ever relative to the broad index since it was created in the late 1990s, data compiled by Bloomberg show. High interest rates, coupled with the work-from-home shift that has reshaped the office market, have hurt the sector.

Even with signs of the U.S. economy cooling, the rally is benefiting from a Fed that is now expected to trim rates after the most aggressive tightening campaign in decades. A strong first half in markets has historically boded well for the rest of the year. However, the run-up to the U.S. presidential election in November and uncertainty about the path of interest-rate cuts could lead to more volatility in the second half.

Solid job growth and consumer spending continue to be key supports to the U.S. economy. The core Personal Consumption Expenditures (PCE) price index – the Fed’s preferred inflation gauge – published at the end of June was up 0.1% m/m in May and up 2.6% y/y.  Higher for longer remains the interest rate narrative to reflect the Fed’s position in 2024. The next Fed move continues to likely be a cut, but not before the September 18 meeting. Fed fund futures are now pricing in a two-third probability of at least one rate cut at the September Federal Open Market Committee (FOMC) meeting, with another hold (92% change) at the July 31 meeting. Treasuries extended gains in June as core PCE inflation was below estimates. The 10-year U.S. Treasury closed June at 4.40% vs. 4.50% at the end of April, 3.88% at the end of December 2023, and from a peak of 5.0% in October 2023. Shorter-term 2-year U.S. Treasury closed 12 basis points lower on the month at 4.75% vs. 4.25% at the end of 2023. The 2y x 10y yield curve remains inverted by 36 basis points at the end of June. The U.S. Aggregate bond index was up 0.9% in June, bringing the YTD return to -0.7%. The Municipal Bond Index was up 1.5% in June but remains in the red YTD (-0.4%).

Gold prices showed significant volatility in June, trading within a range of approximately $2,285 to $2,450 per ounce but closing flat m/m (+12.8% YTD). Oil futures, as measured by the WTI Crude il $/bbl., were up 5.9% in June to $82 bbl. The U.S. Dollar Index, which indicates the general international value of the U.S. Dollar, strengthened by 1.1% in June, bringing the YTD gain to 4.5%. Selling pressure weighed on Bitcoin and crypto markets more broadly during June. Bitcoin’s value declined by 8.5% in June but is up 45.6% YTD. Ethereum followed the trend with -9.9% in June (+49.7% YTD). More progress was made toward the potential listing of spot Ethereum ETF products.

Interest rate volatility has been constant since the Fed began its rate-hiking cycle in 2022. Bond investors closely watch the ICE BofA MOVE (“MOVE”) Index, which measures bond market volatility. The MOVE was relatively unchanged in June, after a spike to 120 in April and from an 86 low at the end of March, indicating a more certain rate environment. The CBOE Volatility Index (“VIX”) remained extremely low throughout the month of June, trading in a narrow range between 11.5 and 13.5, compared to the post-GFC average of 18.5. A low VIX can be a sign of complacency in the stock market.

Chart of the Month – Ratio of Interest Costs to Tax Receipts

The ratio of interest cost to tax receipts is a financial metric used to assess the burden of interest payments on a government’s fiscal resources. It is calculated by dividing the government’s interest payments on public debt by its total tax receipts (revenue) and is usually expressed as a percentage. This ratio provides insight into how much of the government’s tax revenue is being consumed by interest payments, which can impact its ability to fund other essential services and investments.

A low ratio indicates that a smaller portion of tax revenue is being used to service debt, suggesting more fiscal accommodation for other expenditures and investments. A high ratio suggests a significant portion of tax revenue is being used for interest payments, which can limit fiscal flexibility and the government’s ability to respond to economic challenges.

By keeping this ratio in check, governments can maintain fiscal degrees of freedom, ensuring they have the capacity to fund essential services and invest in economic development. When a significant portion of tax revenues is allocated to interest payments, it limits the government’s flexibility to fund other priorities, which can have long-term economic implications.

Interest costs have risen above the “14% threshold,” thought to be significant for policy shifts from stimulus to austerity. The next President and Congress may be forced to deal with the debt. The last time Congress and the President were “forced” to consider austerity was in the nineties.

Quote of the Month

“A government debt is a government claim against personal income and private property – an unpaid tax bill.” – Hans F. Sennholz, German-American economist

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RELATED LINKS

Beacon ‘Pointe of View’ – A Market Update June 2024

Macro & Markets: An Update from Beacon Pointe CIO – August 13, 2024 @ 11am PT / 2pm ET

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