Despite mixed results in the second quarter, U.S. and global equities are entering the second half of 2024 poised for continued positive momentum. Major indices around the world advanced for the most part, reflecting investor optimism about the sustained post-pandemic economic rebound and breakthroughs in technology. However, these positive sentiments remain tempered by renewed inflation concerns and ongoing geopolitical tensions.
Technological advancements, particularly in artificial intelligence (AI), played a pivotal role in driving the equity markets, with tech-heavy indices in the U.S. and Asia recording significant gains. U.S. large-cap stocks, as measured by the S&P 500 Index, notched multiple new all-time highs during the second quarter. While impressive, this rally has remained narrow with the “Magnificent 7” heavily influencing these returns.
Outside of the U.S., economic surprises in Europe have been mostly positive in recent months, including higher consumer confidence due to rising real wages and stabilizing manufacturing activity. Developed international stocks, as measured by the MSCI EAFE Index, were down 0.4% for the quarter but still up over 5% for the year. In the emerging markets, while China continues to struggle, Taiwan and Korea are benefitting from renewed global demand for tech- related exports, and India is benefiting from favorable demographics and economic reforms. The MSCI EM Index was up 5% for the quarter and 7.5% for the year.
Index
2Q24 (04/01/24-06/30/24)
YTD (01/01/24-06/30/24)
1 Year (07/01/23-06/30/24)
S&P 500 Index
4.2%
15.3%
24.6%
Russell 2000 Index
-3.3%
1.7%
10.1%
MSCI EAFE Index
-0.4%
5.3%
11.5%
MSCI Emerging Markets Index
5.0%
7.5%
12.6%
Bloomberg US Aggregate Bond Index
0.1%
-0.7%
2.6%
Source: YCHARTS
Bonds were mostly flat for the quarter with the Fed being stubbornly aloof about their intentions to reduce rates in light of mixed inflation data this year. Chair Powell has been very careful not to move too fast for fear of igniting unacceptable spikes in the cost of living for everyday Americans.
Central banks around the world navigated the delicate balance of supporting growth while keeping inflation in check, leading to varied monetary policy approaches. In the U.S., expectations for multiple interest rate reductions proved to be premature, as these expectations have been reduced to one to two possible reductions later this year.
Overall, the first half of 2024 highlighted the resilience of equity markets amidst a backdrop of recovery, innovation, and ongoing global challenges, including major elections around the world.
We are encouraged by the recovery in the markets post Covid, but we are paying close attention to the composition of the S&P 500 Index and the role a handful of stocks are playing in its recent returns. According to FactSet, just ten stocks make up 37% of the index as of the end of the quarter. The lack of comparative broad market participation in this market cycle has given rise to the temptation of some investors to attempt to chase these outsized returns, a phenomenon worth examining with our readers.
Fear-of-missing-out (FOMO)
The term FOMO was coined in the early 2000s to describe those who seek to be where they perceive the action is, a sentiment in investing that can cause investors to make poor long-term decisions. FOMO affects many aspects of our daily lives and is far more prevalent than you may think. So much so, that FOMO was added to the Oxford English Online Dictionary in 2013. Since then, the dominance of social media has only compounded the FOMO effect.
This time is different
Every market cycle has its own unique characteristics, but they do tend to go through similar cycles over time. We are not suggesting that this market necessarily parallels any past market conditions, but the last time we observed the outsized returns of such a small segment of stocks was in the late nineties, or the dot-com era. As levered as it was at that time, its concentration of stocks in the S&P 500 Index pales in comparison to our present situation as evidenced by the following chart:
To highlight, one of the darlings of the dotcom era was Cisco Systems, a company who provided internet networking solutions to connect the masses to cyberspace. On March 27, 2000, Cisco became the most valuable company in the world, trading at a whopping 220x earnings. Yet, within one year, Cisco had lost over 85% of its value. Cisco was not a flash in the dotcom pan, it was a real company whose growth simply slowed once the hype of the internet waned. Cisco remains a viable company today, yet it has not gotten close to its stock price from roughly twenty-five years ago.
Fast forward to the present and we see a new rising star with the emergence of artificial intelligence, Nvidia. Nvidia specializes in graphics processing units (GPUs) originally designed for video games and graphics applications but has reached staggering heights recently with their application to AI. Nvidia has been around since 1993, but only recently has it exploded into one of the largest publicly traded U.S. companies. Here is a chart of Nvidia’s performance in the last five years:
There is no denying the significant success of Nvidia, one that could persist for quite some time, but the Nineties provided a cautionary tale of what can happen when a small concentration of companies crowd out the broader markets. Dr. Jeremy Siegel, the Wharton professor and author of the bestselling book, Stocks for the Long Run, made this observation about high flying stocks, “History has shown that whenever companies, no matter how great, get priced above 50 to 60 times earnings, buyer beware.”
More significantly, when these cycles end, it may result in a fundamental change in the overall markets and the economy. In the Nineties, the S&P performed well against other areas of the market, boosted by companies such as Cisco and Amazon. Yet, once these dominos started to fall, it set the stage for a meaningful shift in performance away from the S&P 500 Index to broader market indices, and this persisted for the decade of the 2000s. The following bar chart visually demonstrates that fundamental shift:
Source: Dimensional Fund Advisors
Don’t be lured by FOMO
History is littered with examples of hot trends gone cold. We demonstrated the example of the Nineties where many investors abandoned their diversified portfolios to buy booming internet stocks. In the mid 2000s, it seemed everyone wanted to borrow money to flip real estate. A few years later, investors were worried about a double-dip recession and wondered if they should sell their stocks and buy gold instead. Now, cryptocurrency and AI stocks are all the rage. In each case, FOMO caused investors to be more afraid of missing windfalls than suffering large losses. Changing your long-term investment strategy in any of these market conditions would have been a drastic mistake and would have proven quite costly.
At Wealth Dimensions, we are steadfast in our commitment to seeking to implement prudent, diversified portfolio strategies which we believe will help you in achieving your long-term investment goals.
Conspicuously absent from our commentary is the recent assassination attempt of former President Donald Trump, as well as President Joe Biden’s decision to step down from his re-election campaign. We have weighed in on election dynamics in the past, and plan to do so as we get closer to the election.
Thank you for your continued confidence in our services.
– The Wealth Dimensions Team
For informational purposes only. Not intended as investment advice or a recommendation of any particular security or strategy. Information prepared from third-party sources is believed to be reliable though its accuracy is not guaranteed. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of writing and are subject to change without notice. For more information about Wealth Dimensions, including our Form ADV Part 2A Brochure, please visit https://adviserinfo.sec.gov or contact us at 513-554-6000. Please be advised that this material is not intended as legal or tax advice. Accordingly, any tax information provided in this material is not intended and cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.
Quarterly Commentary: Second Quarter 2024
Despite mixed results in the second quarter, U.S. and global equities are entering the second half of 2024 poised for continued positive momentum. Major indices around the world advanced for the most part, reflecting investor optimism about the sustained post-pandemic economic rebound and breakthroughs in technology. However, these positive sentiments remain tempered by renewed inflation concerns and ongoing geopolitical tensions.
Technological advancements, particularly in artificial intelligence (AI), played a pivotal role in driving the equity markets, with tech-heavy indices in the U.S. and Asia recording significant gains. U.S. large-cap stocks, as measured by the S&P 500 Index, notched multiple new all-time highs during the second quarter. While impressive, this rally has remained narrow with the “Magnificent 7” heavily influencing these returns.
Outside of the U.S., economic surprises in Europe have been mostly positive in recent months, including higher consumer confidence due to rising real wages and stabilizing manufacturing activity. Developed international stocks, as measured by the MSCI EAFE Index, were down 0.4% for the quarter but still up over 5% for the year. In the emerging markets, while China continues to struggle, Taiwan and Korea are benefitting from renewed global demand for tech- related exports, and India is benefiting from favorable demographics and economic reforms. The MSCI EM Index was up 5% for the quarter and 7.5% for the year.
(01/01/24-06/30/24)
(07/01/23-06/30/24)
Source: YCHARTS
Bonds were mostly flat for the quarter with the Fed being stubbornly aloof about their intentions to reduce rates in light of mixed inflation data this year. Chair Powell has been very careful not to move too fast for fear of igniting unacceptable spikes in the cost of living for everyday Americans.
Central banks around the world navigated the delicate balance of supporting growth while keeping inflation in check, leading to varied monetary policy approaches. In the U.S., expectations for multiple interest rate reductions proved to be premature, as these expectations have been reduced to one to two possible reductions later this year.
Overall, the first half of 2024 highlighted the resilience of equity markets amidst a backdrop of recovery, innovation, and ongoing global challenges, including major elections around the world.
We are encouraged by the recovery in the markets post Covid, but we are paying close attention to the composition of the S&P 500 Index and the role a handful of stocks are playing in its recent returns. According to FactSet, just ten stocks make up 37% of the index as of the end of the quarter. The lack of comparative broad market participation in this market cycle has given rise to the temptation of some investors to attempt to chase these outsized returns, a phenomenon worth examining with our readers.
Fear-of-missing-out (FOMO)
The term FOMO was coined in the early 2000s to describe those who seek to be where they perceive the action is, a sentiment in investing that can cause investors to make poor long-term decisions. FOMO affects many aspects of our daily lives and is far more prevalent than you may think. So much so, that FOMO was added to the Oxford English Online Dictionary in 2013. Since then, the dominance of social media has only compounded the FOMO effect.
This time is different
Every market cycle has its own unique characteristics, but they do tend to go through similar cycles over time. We are not suggesting that this market necessarily parallels any past market conditions, but the last time we observed the outsized returns of such a small segment of stocks was in the late nineties, or the dot-com era. As levered as it was at that time, its concentration of stocks in the S&P 500 Index pales in comparison to our present situation as evidenced by the following chart:
To highlight, one of the darlings of the dotcom era was Cisco Systems, a company who provided internet networking solutions to connect the masses to cyberspace. On March 27, 2000, Cisco became the most valuable company in the world, trading at a whopping 220x earnings. Yet, within one year, Cisco had lost over 85% of its value. Cisco was not a flash in the dotcom pan, it was a real company whose growth simply slowed once the hype of the internet waned. Cisco remains a viable company today, yet it has not gotten close to its stock price from roughly twenty-five years ago.
Fast forward to the present and we see a new rising star with the emergence of artificial intelligence, Nvidia. Nvidia specializes in graphics processing units (GPUs) originally designed for video games and graphics applications but has reached staggering heights recently with their application to AI. Nvidia has been around since 1993, but only recently has it exploded into one of the largest publicly traded U.S. companies. Here is a chart of Nvidia’s performance in the last five years:
There is no denying the significant success of Nvidia, one that could persist for quite some time, but the Nineties provided a cautionary tale of what can happen when a small concentration of companies crowd out the broader markets. Dr. Jeremy Siegel, the Wharton professor and author of the bestselling book, Stocks for the Long Run, made this observation about high flying stocks, “History has shown that whenever companies, no matter how great, get priced above 50 to 60 times earnings, buyer beware.”
More significantly, when these cycles end, it may result in a fundamental change in the overall markets and the economy. In the Nineties, the S&P performed well against other areas of the market, boosted by companies such as Cisco and Amazon. Yet, once these dominos started to fall, it set the stage for a meaningful shift in performance away from the S&P 500 Index to broader market indices, and this persisted for the decade of the 2000s. The following bar chart visually demonstrates that fundamental shift:
Source: Dimensional Fund Advisors
Don’t be lured by FOMO
History is littered with examples of hot trends gone cold. We demonstrated the example of the Nineties where many investors abandoned their diversified portfolios to buy booming internet stocks. In the mid 2000s, it seemed everyone wanted to borrow money to flip real estate. A few years later, investors were worried about a double-dip recession and wondered if they should sell their stocks and buy gold instead. Now, cryptocurrency and AI stocks are all the rage. In each case, FOMO caused investors to be more afraid of missing windfalls than suffering large losses. Changing your long-term investment strategy in any of these market conditions would have been a drastic mistake and would have proven quite costly.
At Wealth Dimensions, we are steadfast in our commitment to seeking to implement prudent, diversified portfolio strategies which we believe will help you in achieving your long-term investment goals.
Conspicuously absent from our commentary is the recent assassination attempt of former President Donald Trump, as well as President Joe Biden’s decision to step down from his re-election campaign. We have weighed in on election dynamics in the past, and plan to do so as we get closer to the election.
Thank you for your continued confidence in our services.
– The Wealth Dimensions Team
For informational purposes only. Not intended as investment advice or a recommendation of any particular security or strategy. Information prepared from third-party sources is believed to be reliable though its accuracy is not guaranteed. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of writing and are subject to change without notice. For more information about Wealth Dimensions, including our Form ADV Part 2A Brochure, please visit https://adviserinfo.sec.gov or contact us at 513-554-6000. Please be advised that this material is not intended as legal or tax advice. Accordingly, any tax information provided in this material is not intended and cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.