1. U.S. large cap stocks continue to outperform year-to-date.
This chart shows the performance of SPY (SPDR S&P 500 Index ETF in purple), EFA (iShares MSCI EAFE ETF in blue), EEM (iShares MSCI Emerging Markets ETF in orange), and IWM (iShares Russell 2000 ETF in grey).
2. Stocks with strong 12-month price momentum (the momo factor) have been standpoint performers in 2024.
Source: S&P Dow Jones Indices
Source: S&P Dow Jones Indices
Year-to-date within the S&P 500 Index universe, the momentum factor (orange bars in the charts above) has returned almost 34% year-to-date and outperformed the index by almost 19%.
Over the last 12 months, the momentum factor has returned 57.9%, crushing the S&P 500 Index return of 24.6%. S&P Dow Jones Indices noted this magnitude of outperformance last occurred in August 2000 at the end of the dot-com boom.
3. In a surprise, gold has been the other outperforming asset class.
This chart shows the performance of SPY (SPDR S&P 500 Index ETF in purple), GLD (SPDR Gold Trust in yellow), DXY (U.S. Dollar Index in green), JNK (SPDR Bloomberg High Yield Bond ETF in orange), IEF (iShares 7-10 Year Treasury Bond ETF in blue), and TLT (iShares 20+ Year Treasury Bond ETF in red).
Gold typically underperforms in periods of U.S. Dollar strength, when inflation is declining, and when long-term interest rates are rising. All three circumstances have occurred this year and yet gold has outperformed. The reason is clear. Strong demand for gold has emanated from the east, with The Central Bank of the People's Republic of China being the biggest buyer.
4. Inflationary pressures are starting to ease. Inflation remains a headwind for investors seeking high real returns (real return = nominal return - rate of inflation).
In the U.S., the headline inflation rate had plateaued over 1% above pre-pandemic levels. In the last three months it has started to creep down.
The “core” inflation rate (excludes food and energy) has continued to creep down but also remains over 1% above pre-pandemic levels.
Due to sticky inflation, the FOMC has kept the effective federal funds rate at 5.33% for the past year.
We discussed the inflation challenge in more detail in April’s market update.
5. Despite sticky inflation and no rate cuts by the FOMC, U.S. financial conditions remain loose and U.S. credit markets remain sanguine.
Over the last few months, the Chicago Fed’s National Financial Conditions Index has been signaling looser financial conditions, suggesting monetary policy is not restrictive despite 525 basis points of federal funds rate increases over the last two years.
At month end June 2024. high yield bond spreads remained subdued and had settled almost 200 basis points below the long-term average and well below recent peaks.