Weekend Read: Investments Soar In The First Half

Estimated Reading Time: 4 minutes

It looks like major components of the “everything bubble” were back in action during the first half of 2024.  Ample liquidity and strong investor sentiment triumphed again over caution about narrowing participation and over-valuation.

Earnings look to come in pretty decent and the economy, while showing some soft patches, continued to grow.

The bellwether S&P stock index was up 15.3% in the first half.  Moreover, the S&P hit 31 new all-time highs during the first half, the best in 25 years.

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The tech-heavy NASDAQ was up 17.33%.

Once again, large-cap growth trounced smaller cap and value issues.  S&P growth was up 23.45% while S&P value was up just 5.64.%

The equal weight S&P was up 4.96%.

Commodities were selectively stronger with oil up 19.41%.  Gold was up 12.47% and Silver was up 22%.  Natural Gas and lumber were down sharply.  However, the general commodity index is flirting with a downturn.

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Bonds continued to suffer from both inflation and oversupply due to the ghastly funding needs of the US government. The Aggregate Bond index was down. a-.72%  and longer duration bonds such as the 20-plus year maturities were down -5.64%.

Another area that continues to have problems is real estate.  Commercial real estate in particular has had some spectacular losses, worrying investors about segments of the mid-cap banking sector.  Office space continues to trade well off the levels of just a few years ago, and other areas of commercial real estate are softening.

Home affordability is terrible, most home prices remain sticky, but turnover has slowed substantially, and of late there has been a surge in supply as homes come on the market.  The price-to-income ratio is often used to measure affordability.  In the 1960s and 70s, it was around 2, meaning it took 2 years of income to buy the median-priced home. Nationally it is now about 3.6 and in areas of the West like California, it is approaching 5, meaning it would take five years of income to buy an average price home.

The housing affordability crisis has been caused by both housing inflation and the rise in interest rates.

US new home inventory has doubled in the past two years, reaching a level not seen since the tail end of the Great Financial Crisis in 2009.

Despite the excellent first-half performance, worries about consumers’ health are building.  Consumer Sentiment has now dropped to about the same level as during the “ Covid Crash”, and signs the consumer is tiring are surfacing.  Since consumer spending is about 70% of the economy, this could prove to be important.

But so far, it has been mostly worrying.  In terms of actual spending, the consumer continues to spend freely.  Some of those signs are rising consumer debt, coupled with rising consumer default rates on consumer debt.  Consumer default rates now approach the level during the last financial crisis.

Much of the buildup of consumer cash, artificially buoyed by Covid checks and large fiscal deficits, is now back down to pre-Covid levels.

 

Hardship withdrawals from 401Ks were up 40%, indicating consumers are being forced to liquidate long-term retirement savings to survive in the present.

Thus, consumers continue to spend like drunken sailors but are straining to do so.

Stimulus from government continues, whether needed or not. Large fiscal deficits have created excess liquidity.  As we have pointed out, many government credit facilities have offset the contractionary influence of higher interest rates.

However, the prospect of a possible Republican victory should produce a greater propensity to slow spending and try to at least reduce the rate of deficit increases.  That is if Republicans remember they are supposed to be the party of fiscal prudence both debt and stimulus should be reduced.  But neither party of late has treated the deficit as a serious problem and hence bond markets now have a serious supply problem.  Rising supply without a corresponding increase in demand, suggests lower bond prices.  That is another way of saying higher interest rates.

What was remarkable about the first half was how well markets did (except the bond market) with no FED reduction in interest rates. They also shook off signs of expanding war in both Ukraine and the Middle East.

US equity markets continued to outperform foreign markets as well and have reached record valuations versus foreign markets.   The only foreign market to get anywhere near US returns was India, up 14.28%.

Market concentration usually creates a “breadth problem”, which usually translates into poor market returns, but poor returns did not show up in the first half. Once again just 5 companies of the S&P 500 index now account for 27% of the entire index capitalization, the most lopsided concentration since 1980.

In terms of performance, 73% of the first-half gains came from just seven stocks within the S&P.  Remove just seven large-cap tech stocks out of the 500 and the remaining 493 would have performance below 5%.

Once again, anything having to do with Artificial Intelligence soared and dragged the performance of the market along with it.  That was both wonderful and worrisome.

The market faces more uncertainty just ahead.  Will the FED deliver any rate cuts this year? How much turbulence will we see due to the political situation both in Europe and the US?

Meanwhile, the market continues to show good technical price action, with few and shallow corrections and the main market averages are staying well above both short-term linear and moving average trends.

In the short term, the market once again has become “overbought” on a momentum basis.  Temporary excesses need to be worked off either by the market moving sideways for a while or experiencing some sort of summer correction.  Linear resistance comes in around 5300 with the 200-day moving average moving average at 4850.  As long as we can stay north of those levels, the benefit of the doubt must be given to the bulls.

A break below 5300 on the S&P would be the first alert that maybe a correction would be the path for the run-up to the election.  Since the markets are forward-looking, the market is likely already trying to discount the election results.  The probability of confusion seems to be rising. Will Biden resign, will he be impeached, will the 25th Amendment come into play, will he be replaced at the convention, and then the election itself? It will be difficult to handicap the outcome.

Markets usually don’t like such uncertainty but that and more, is what they will have to deal with in the second half.

 

 

 

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