Getting Healthier
With less than three months to go in 2024, its worth examining recent market trajectories and noting some of the changes and dynamics currently underway. Many are concerned that the market has risen too far, too fast, but when looking under the hood and placing this in the context of our macro view, we find solid foundations and a strong case for the sort of diversification we adopt across ACM strategies.
The S&P 500 year-to-date is up 23.2% and since October 27th of last year it’s up a very strong 43.2%! Why single out Oct 27th of last year? From late July of 2023 through late October, equities fell by 10% out of fear that the Fed was going to continue hiking rates. Equities were in a downdraft, but by late October it had become apparent that inflation was moving sufficiently in the right direction for the Fed, in fact, to cease hiking rates, and the market collectively started to move higher on Oct 27th.
The market rally, however, was largely led by the mega cap technology stocks while the vast majority of the rest of the market trailed the mega cap tech rally. In other words, the market was placing a premium on the proven strong growth of the mega cap tech companies and was collectively less enthusiastic about the outlook for the broader market. And this made sense if you believed that the economy was going to slow sharply or was entering a recession due to the high real interest rates in place by the Fed. So, from Oct 27th through the next eight or so months this trend was in place and was very strong. From last Oct 27th through July 10th of this year the Mag 7 were up 77.7%, the S&P 500 was up 38.3%, and the S&P 500 Equal Weight was up 25.2%. Over 52% difference between the mega cap tech names compared to the broader market!
In early July of this year, two economic reports moved markets. The jobs report for June came in about in line with expectations and the CPI report on July 11th was somewhat softer than expected – neither was dramatically different from the market’s expectations. These two reports, however, shifted the perception of the economic outlook, creating a belief that we were, to the surprise of many, experiencing either a soft landing or perhaps no landing at all.
So, since July 10th we’ve seen a divergence away from the mega cap tech and toward a broadening out of equity performance and leadership. This is very encouraging and healthy for the markets as we look out over the next few to several months. The market going up sharply as it had on just six or seven tech names and not much else wasn’t, and isn’t, sustainable.
Now we see the S&P 500 up 3.6% since July 10th, compared to the equal weight version of the S&P 500, up 9.4%. It gets more interesting as we look further into the details. Homebuilding stocks, as measured by the iShares U.S. Home Construction ETF, are up 23% as mortgage rates have fallen from 7.8% a year ago to now at about 6.4%. Real estate and related stocks are up 13%. Within the real estate stocks, we see two large commercial real-estate services companies, CBRE and JLL, up 35% and 27%, respectively. Utilities, surprisingly, has been the strongest sector since July 10th, up 14.9%. This strong performance in utilities is a stealth AI play as electricity demand ramps up rapidly because of the buildout of new data centers. Even more broadening occurred in markets. Aerospace & defense stocks are up 14.6% and the S&P 500’s Industrial sector is up 13.8%. And regional banks are up 16%, small banks are up 15% and the large banks are up 12%. Clearly, these represent some of the interest rate sensitive and pro-cyclical areas of the market and are indicative of an economy that is doing fairly well. The Federal Reserve Bank of Atlanta’s GDPNow forecast for Q3 GDP is currently at 3.2%.
In contrast, we see the market leaders over most of the prior year underperforming since July 10th. The semiconductor Index (SOX) is down 9.4% and the Mag 7 collectively are down 6%. The communication services and information technology sectors are the only two sectors that are in the red since July 10th, down 2.1% and 2.7%, respectively.
The takeaway from this look at the markets is that the broadening out of performance represents a much healthier market to set up the next few months and close out 2024. Further, it’s worth noting the accuracy of the outlook from ACM’s CIO Chuck Lieberman on short-term and long-term interest rates, the direction of the economy, and the overall direction of the equity markets. This outlook has underpinned the positioning across ACM strategies.
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