Economic growth in the U.S. is showing signs of slowing as the lagged effect of significant interest rate hikes by the U.S. Federal Reserve impacts activity. Despite the slowdown, we still expect the economy to grow near its historical trend growth of 2.0% Real Gross Domestic Product (GDP) this year. We have increased confidence that the U.S. will be able to avoid a recession in the near term. The job market remains our key determinant for when and if significant economic weakness appears.
The job market did show some signs of slowing in the second quarter as the economy added 532K nonfarm jobs as compared with 692K in the first quarter. The unemployment rate ended the quarter at 4.1%, up from 3.8% in March and tied for the highest level since October 2021. Wage inflation was up 3.9% year-over-year in June but down from the 4.1% level in March. Disinflationary trends continued in the second quarter as the June Consumer Price Index (CPI) was up 3.0% year-over-year, which compares to a 3.5% increase in March. The June gain was the lowest year-over-year increase since April 2021.
The U.S. Federal Reserve maintained its target federal funds rate in the range of 5.25% to 5.50% during the second quarter, which remains at the level reached in July last year. We continue to believe the Fed has ended its tightening cycle, which increased rates 11 times from a 0.00%-0.25% level in March 2022. Fed guidance in June was updated to reflect one 25 basis point (bps) cut this year, which was decreased from a forecast of three 25 basis point (bps) cuts in March as inflation remained “sticky,” driven primarily by high rent and auto insurance costs. We expect at least one 25 bps interest rate cut this year as the Fed shifts its focus to the job market and its maximum employment mandate. A market risk remains should Fed policy diverge from market expectations.
Capital Markets Performance
Interest rate volatility continued during the second quarter, with rates moving higher across the curve on lower market expectations for interest rate cuts this year. The 2-year Treasury ended the quarter up 12 bps at 4.71%, while the 10-year Treasury yield ended the quarter up 16 bps at 4.36%. The Bloomberg Barclays U.S. Aggregate Index was up 0.1% in the quarter, with five out of six sectors recording small gains. Corporate Bonds were down slightly (-0.1%). Lower-rated bonds and shorter-duration bonds were relative outperformers in the second quarter.
U.S. equities were mixed in the second quarter as Large-Cap Growth stocks and the “Magnificent Seven” led performance. The S&P 500 ended the quarter up 4.3% and at a record high. Large-Caps outperformed Mid-and Small-Caps in the quarter, with growth leading value across market capitalization. Large Cap Growth (+8.3%) was the best relative performer in the second quarter. Five of the eleven S&P 500 sectors were positive performers in the quarter, led by Technology (+13.8%) and Communication Services (+9.4%). The Materials sector was the weakest performer (-4.5%).
International stocks also had mixed returns in the second quarter. The MSCI ACWI ex USA Index gained 1.0%, while the MSCI Emerging Markets Index was up 5.0%. MSCI Pacific (-2.2%) was the weakest-relative performing region in the quarter.
The European Central Bank (ECB) cut rates in June for the first time in five years, lowering its main refinancing rate 25 basis points (bps) to 4.25%. The Bank of England (BOE) kept rates unchanged during the quarter and at a 16-year high, while the Bank of Japan (BOJ) also kept rates unchanged but announced their intention to start trimming their bond purchase program later this year. The U.S. dollar (DXY) strengthened by 1.3% in the second quarter and appreciated 2.9% year-over-year. A stronger dollar tends to be a headwind for international equity returns.
Outlook and Portfolio Positioning
While we still expect the U.S. economy to slow over the remainder of the year, the odds of the economy avoiding a recession this year have improved, in our view, due to continued resiliency in consumer spending. Stubborn inflation, central bank interest rate policy, election uncertainty and geopolitical tensions around the globe remain key market risks.
We remain balanced in our equity positioning between growth and value, as we believe market performance will broaden across market sectors because of elevated valuations for many growth stocks. Valuations for both Mid and Small-Cap stocks remain attractive versus Large-Caps, in our view. A weaker U.S. dollar, improving Chinese economic growth and attractive relative valuations remain potential catalysts for international markets, especially emerging markets. We believe valuation and quality remain the key factors driving global equity performance.
Our fixed income portfolio remains positioned toward intermediate duration and a tilt toward quality, consistent with our expectations for economic data to weaken. Despite continued rate volatility year to date, we continue to believe interest rates for this economic cycle peaked in mid-October of last year. Investors should continue to focus on the “income” component of fixed income returns in 2024, as we expect interest rates to remain range bound throughout the year.
Despite market volatility, it is important to stay diversified and invested for the long term. History shows that time in the markets produces better outcomes than attempting to time the markets.
As always, we thank you for your continued support and trust in Newport Capital Group.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. In addition, information presented in this presentation is believed to be factual and up to date, but Newport Capital Group, LLC does not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed.
This presentation includes forward-looking statements and opinions, including descriptions of anticipated market changes and expectations of future activity. Forward-looking statements and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. In addition, all expressions of opinion are subject to change without notice in reaction to shifting market conditions. Therefore, undue reliance should not be placed on such forward-looking statements and opinions.
Historical performance results for investment indices are provided for general educational purposes only. Indexes are unmanaged, do not incur fees or expenses (which decrease historical performance returns), and cannot be invested in directly. Therefore, it should not be assumed that future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended by Newport Capital Group, LLC) or product will be profitable or equal the corresponding indicated performance level(s).
Investing involves risk including a total loss of the principal amount invested. In addition, diversification strategies do not ensure a profit and do not protect against losses in declining markets.
Past performance is not indicative of future returns.
Market Commentary & Outlook – Q2 2024
BY Newport Capital Group
U.S. Economy and the Federal Reserve
Economic growth in the U.S. is showing signs of slowing as the lagged effect of significant interest rate hikes by the U.S. Federal Reserve impacts activity. Despite the slowdown, we still expect the economy to grow near its historical trend growth of 2.0% Real Gross Domestic Product (GDP) this year. We have increased confidence that the U.S. will be able to avoid a recession in the near term. The job market remains our key determinant for when and if significant economic weakness appears.
The job market did show some signs of slowing in the second quarter as the economy added 532K nonfarm jobs as compared with 692K in the first quarter. The unemployment rate ended the quarter at 4.1%, up from 3.8% in March and tied for the highest level since October 2021. Wage inflation was up 3.9% year-over-year in June but down from the 4.1% level in March. Disinflationary trends continued in the second quarter as the June Consumer Price Index (CPI) was up 3.0% year-over-year, which compares to a 3.5% increase in March. The June gain was the lowest year-over-year increase since April 2021.
The U.S. Federal Reserve maintained its target federal funds rate in the range of 5.25% to 5.50% during the second quarter, which remains at the level reached in July last year. We continue to believe the Fed has ended its tightening cycle, which increased rates 11 times from a 0.00%-0.25% level in March 2022. Fed guidance in June was updated to reflect one 25 basis point (bps) cut this year, which was decreased from a forecast of three 25 basis point (bps) cuts in March as inflation remained “sticky,” driven primarily by high rent and auto insurance costs. We expect at least one 25 bps interest rate cut this year as the Fed shifts its focus to the job market and its maximum employment mandate. A market risk remains should Fed policy diverge from market expectations.
Capital Markets Performance
Interest rate volatility continued during the second quarter, with rates moving higher across the curve on lower market expectations for interest rate cuts this year. The 2-year Treasury ended the quarter up 12 bps at 4.71%, while the 10-year Treasury yield ended the quarter up 16 bps at 4.36%. The Bloomberg Barclays U.S. Aggregate Index was up 0.1% in the quarter, with five out of six sectors recording small gains. Corporate Bonds were down slightly (-0.1%). Lower-rated bonds and shorter-duration bonds were relative outperformers in the second quarter.
U.S. equities were mixed in the second quarter as Large-Cap Growth stocks and the “Magnificent Seven” led performance. The S&P 500 ended the quarter up 4.3% and at a record high. Large-Caps outperformed Mid-and Small-Caps in the quarter, with growth leading value across market capitalization. Large Cap Growth (+8.3%) was the best relative performer in the second quarter. Five of the eleven S&P 500 sectors were positive performers in the quarter, led by Technology (+13.8%) and Communication Services (+9.4%). The Materials sector was the weakest performer (-4.5%).
International stocks also had mixed returns in the second quarter. The MSCI ACWI ex USA Index gained 1.0%, while the MSCI Emerging Markets Index was up 5.0%. MSCI Pacific (-2.2%) was the weakest-relative performing region in the quarter.
The European Central Bank (ECB) cut rates in June for the first time in five years, lowering its main refinancing rate 25 basis points (bps) to 4.25%. The Bank of England (BOE) kept rates unchanged during the quarter and at a 16-year high, while the Bank of Japan (BOJ) also kept rates unchanged but announced their intention to start trimming their bond purchase program later this year. The U.S. dollar (DXY) strengthened by 1.3% in the second quarter and appreciated 2.9% year-over-year. A stronger dollar tends to be a headwind for international equity returns.
Outlook and Portfolio Positioning
While we still expect the U.S. economy to slow over the remainder of the year, the odds of the economy avoiding a recession this year have improved, in our view, due to continued resiliency in consumer spending. Stubborn inflation, central bank interest rate policy, election uncertainty and geopolitical tensions around the globe remain key market risks.
We remain balanced in our equity positioning between growth and value, as we believe market performance will broaden across market sectors because of elevated valuations for many growth stocks. Valuations for both Mid and Small-Cap stocks remain attractive versus Large-Caps, in our view. A weaker U.S. dollar, improving Chinese economic growth and attractive relative valuations remain potential catalysts for international markets, especially emerging markets. We believe valuation and quality remain the key factors driving global equity performance.
Our fixed income portfolio remains positioned toward intermediate duration and a tilt toward quality, consistent with our expectations for economic data to weaken. Despite continued rate volatility year to date, we continue to believe interest rates for this economic cycle peaked in mid-October of last year. Investors should continue to focus on the “income” component of fixed income returns in 2024, as we expect interest rates to remain range bound throughout the year.
Despite market volatility, it is important to stay diversified and invested for the long term. History shows that time in the markets produces better outcomes than attempting to time the markets.
As always, we thank you for your continued support and trust in Newport Capital Group.
Download the full commentary, here.
Disclosures
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. In addition, information presented in this presentation is believed to be factual and up to date, but Newport Capital Group, LLC does not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed.
This presentation includes forward-looking statements and opinions, including descriptions of anticipated market changes and expectations of future activity. Forward-looking statements and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. In addition, all expressions of opinion are subject to change without notice in reaction to shifting market conditions. Therefore, undue reliance should not be placed on such forward-looking statements and opinions.
Historical performance results for investment indices are provided for general educational purposes only. Indexes are unmanaged, do not incur fees or expenses (which decrease historical performance returns), and cannot be invested in directly. Therefore, it should not be assumed that future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended by Newport Capital Group, LLC) or product will be profitable or equal the corresponding indicated performance level(s).
Investing involves risk including a total loss of the principal amount invested. In addition, diversification strategies do not ensure a profit and do not protect against losses in declining markets.
Past performance is not indicative of future returns.
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