The equity markets continued to roll in the second quarter, as the broader market and specifically the tech sector led the rally. Gains were driven by spectacular earnings from some of the largest U.S. companies, as well as moderation in several inflation indicators. Apple and Nvidia alone accounted for 23% and 37% of the return in the S&P 500 during the quarter. Overall, the S&P 500 experienced the strongest half to an election year since 1944 and reached a new all-time high on June 18th, all occurring while the Fed Funds rate has been held at 5.25-5.50% for a year, the highest level since 2001. While high in relative terms, the rate is only slightly above the average terminal Fed Funds rate of approximately 4.00% that we have seen historically. We remain cautious in recommending equities on a broad scale, as we will need to see economic results, inflation statistics and company earnings continue to exceed already high expectations to sustain the new high levels. We see the largest threat to the market as really anything that threatens the largest of large cap stocks, as they are guiding the ship. Further adding to positive news for the quarter, the U.S. unemployment rate dropped to 4% in May, the lowest reading since January 2022. Also positive was the fact that the Fed balance sheet is down to $7.2T from $9.0T in 2022. Alternatively, signs of caution have popped up. Personal household debt levels, especially credit card debt, have reached a record high, while personal savings rates have declined. The yield curve also remains inverted since July 2022. So prudence while investing and allocating investments is of utmost importance this year.
Major U.S. stocks posted gains for the quarter, as the S&P500 rose 4.3%. The tech heavy NASDAQ continued to lead all indices with a gain of 8.1% in Q2. The DJ Industrial Average dropped -1.3% in the quarter. Internationally, the EAFE pulled back slightly, falling -0.4%. Fixed Income, measured by the Bloomberg U.S. Aggregate Bond index was essentially flat, gaining just 0.1%. U.S Treasuries continued to remain inverted slightly, as the 2-yr ended the quarter at 4.77%, while the 10-yr ended at 4.48%. Gold ended the quarter up slightly 2.7%, with a solid 21.1% gain for the first half of 2024. Crude oil provided some welcomed relief in the quarter, pulling back -21.4%, now up just 4.0% for the year. The average stock in Morningstar’s coverage universe ended the quarter trading 3% above fair market value. The only two sector valuations that ended the quarter below fair market value were Real Estate trading 12% below and Basic Materials ending 8% below. Technology and Communication Services traded to end the quarter at 9% and 6% overvalued respectively. All remaining sectors ended the quarter trading slightly above or below fair market value1. The current P/E ratio of 29.01 for the S&P500 continues to give us pause, now representing a valuation that is 81% over the historic average.
The next half of the year may bring about significant changes to the political environment in America. Please stay tuned to any modifications on market conditions, as we constantly adjust our outlook to markets and sectors based upon current events and outlooks. We look forward to navigating the equity and bond markets for our clients, while continually earning your business, your referrals and your respect.
Jack A. Kennedy
Chief Investment Officer
1 Results referenced from Morningstar.com