Markets were mixed in the second quarter, as concerns remain that persistent inflation will lead to interest rates being “higher for longer.” US Large Cap stocks did well, again led by some of the Mag 7, while the rest of the US and developed country equity markets treaded water or lostground. Emerging Markets stocks had the strongest returns for the quarter despite the headwind of a surging US dollar, a nice change.
After year-over-year CPI came down in the latter half of 2023, pricing pressures turned back upwards in the first quarter. Along with hotterthan expected jobs gains, that reduced expectations for rate cuts in the US. Market participants went from expecting multiple rate cuts in theyear, to wondering if any cuts were on the table. This matters because higher interest rates are a double-edged sword. On one hand, it works tocool the economy and in theory tamp down inflation due to excess demand; on the other hand, it crimps business activity and puts pressure onsmall businesses. Those concerns abated somewhat, but not entirely, as inflation and labor market data cooled in June. InternationalDeveloped and US Small Cap stocks, down in the second quarter, were still positive for the year. US Large Cap and Emerging Markets stockshave strong returns on both a quarterly and YTD basis.
Source: Morningstar Direct and Tamarac Reporting, as of 06/30/2024. Please see important disclosures below.
The “AI rally” appears to be one of the main drivers of the returns of US Large Cap Stocks, with Nvidia alone contributing 30% of the S&P 500’s total return for the year. [1] What you may not have seen coming is the AI rally moving overseas, to Taiwan, which raised its 2024 GDP forecast on strong AI-related exports in May. [2] Taiwan makes up over 18% of the Emerging Markets index [3] and was up almost 30% for the year. [4] This is another good example of why we focus on diversification – returns can come from surprising places.
Investment grade bonds and high-quality municipals were essentially flat for the second quarter, as yield volatility moderated. After starting the quarter at 4.33% – the yield on the 10-year US Treasury bond was 4.36% to end the quarter. [5] High yield bonds had positive returns in the second quarter, in part because of their higher starting yields limiting the impact of yield volatility, and in part because of the continued resilience of the US economy.
Concerns about a recession continue, as they likely will until the Fed begins cutting rates, and perhaps after that. While progress has been made on the inflation front and the US economy is resilient so far, we are not out of the woods yet.
[1] Karen Langley, “S&P 500 has climbed 14% despite reduced hopes for interest-rate cuts”, WSJ Print Edition. June 29, 2024. Accessed 7/2/2024. Page B11.
[2] Faith Hung and Emily Chan, “Taiwan raises 2024 GDP forecast on strong AI-related exports, home consumption”, Reuters. https://www.reuters.com/markets/asia/taiwan-raises-2024-gdp-forecast-strong-ai-related-exports-home-consumption-2024-05-30/.
[3] Source: MSCI. MSCI Emerging Markets fact sheet as of 5/31/24.
[4] JPM Guide to the Markets. “Global Equity Markets”, slide 42. Data as of 6/30/2024.
[5] Treasury.gov. Daily Treasury Par Yield Curve Rates. https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value=2024.
Important Disclosures
Team Hewins, LLC (“Team Hewins”) is an SEC registered investment adviser; however, such registration does not imply a certain level of skill or training, and no inference to the contrary should be made. We provide this information with the understanding that we are not engaged in rendering legal, accounting, or tax services. We recommend that all investors seek out the services of competent professionals in any of the aforementioned areas.
The volatilities of any comparative indices included in this presentation may be materially different from the individual performance attained by a specific client in a Team Hewins strategy. In addition, client holdings may differ significantly from the securities that comprise the indices. The indices have not been selected to represent an appropriate benchmark to compare an investor’s performance, but rather are disclosed to allow for comparison to the performances of certain well-known and widely recognized indices. The indices are unmanaged, include reinvestment of dividends, capital gain distributions or other earnings and do not reflect any fees or expenses. Indices cannot be invested in directly. Set forth below are descriptions of the indices included in the presentation.
Past performance is not an indication of future returns. Comments provided herein reflects Team Hewins’ views as of the date of this write up and are provided for informational purposes only. Such views are subject to change at any point without notice. Some of the information was obtained from third party sources believed to be reliable but the information is not guaranteed. Any forward-looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. Due to various risks and uncertainties no reliance should be placed on any such statements or forecasts when making any investment decision. Nothing presented herein is or intended to be investment advice or a recommendation to buy or sell any securities and no investment decision should be made based solely on the information provided. Team Hewins is not responsible for the consequences of any decisions or actions taken as a result of information provided in this writeup and does not warrant or guarantee the accuracy or completeness of the information. There is a risk of loss from an investment in securities, including the risk of loss of principal. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Asset allocation and portfolio diversification cannot assure or guarantee better performance and cannot eliminate the risk of investment losses.
Source: © [2023] Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising.
Index returns for JPM GBI EM GD USD Unhedged Index (Emerging Markets Bonds) sourced from Tamarac Reporting and JP Morgan.
Index Descriptions
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S&P 500 Index (Large Cap U.S. Stocks): measures the performance of large capitalization U.S. Stocks. It is a market-value-weighted index of 500 stocks that are traded on the NYSE, NYSE MKT, and NASDAQ. The weightings make each company’s influence on the Index performance directly proportional to that company’s market value.
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Russell 2000 Index (Small Cap U.S. Stocks): An unmanaged index that measures the performance of the small-cap segment of the U.S. equity universe. It is a subset of the Russell 3000 Index, representing approximately 10% of the total market capitalization of that index and includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. Russell Investment Group owns the Russell Index data, including all applicable trademarks and copyrights.
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MSCI EAFE Index (International Developed Stocks): The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. The MSCI EAFE Index consists of the following 22 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.
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MSCI Emerging Markets Index (Emerging Markets Stocks): is a Morgan Stanley Capital International Index that is designed to measure the performance of equity markets in 25 emerging countries around the world.
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Bloomberg Barclays US Aggregate Bond Index (Investment Grade U.S. Bonds): includes U.S. government, corporate, and mortgage-backed securities with maturities of at least one year.
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Bloomberg Barclays Muni Bond Index 1-10 Yr Blend (1-12) (Int-Term Municipal Bonds): A market value-weighted index which covers the short and intermediate components of the Barclays Capital Municipal Bond Index. The 1-10 Year Municipal Blend index tracks tax-exempt municipal General Obligation, Revenue, Insured, and Prerefunded bonds with a minimum $5 million par amount outstanding, issued as part of a transaction of at least $50 million, and with a remaining maturity from 1 up to (but not including) 12 years.
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ICE BofA Merrill Lynch U.S. High Yield, BB-B Rated, Constrained Index (High Yield U.S. Bonds): Tracks the performance of US dollar-denominated below-investment-grade (BBB rated) corporate debt publicly issued in the US domestic market. Qualifying bonds are capitalization-weighted provided the total allocation to an individual issuer does not exceed 2%. Issuers that exceed the limit are reduced to 2% and the face value of each of their bonds is adjusted on a pro-rata basis.
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JPM GBI EM GD USD Unhedged Index (Emerging Markets Bonds): The JP Morgan EMBI Global Diversified is a uniquely weighted index that tracks total returns for U.S. dollar-denominated Brady bonds, Eurobonds, traded loans, and local market debt instruments issued by sovereign and quasi-sovereign entities. The index limits the weights of countries with larger debt stocks by only including a specified portion of these countries’ eligible current face amounts of debt outstanding.