As we enter the second half of 2023, it is the perfect time to review the last quarter. Overall, bulls continued to run during the second quarter of 2024 as several major stock indexes broke out of recent trading ranges to the upside.

Stock Market Performance

In the second quarter, the S&P 500 increased by approximately 3.90%, the Nasdaq Composite rose by close to 8.1%, and the Dow Jones Industrial Average decreased by nearly 1.7%. These movements highlight the varying performance across major indices, influenced by different sectors and market dynamics.

Interest Rates and Inflation

At the beginning of the year, there was widespread speculation about multiple rate cuts. However, due to sticky inflation, which has shown early signs of potentially softening, the narrative has shifted. Current expectations are for one rate cut in 2024, with uncertainty around the timing due to the presidential election.

Inflation Metrics

The Consumer Price Index (CPI) inflation rate declined in Q2, with May showing a year-over-year inflation rate of 3.3%. Core CPI, which excludes food and energy, dropped to a three-year low of 3.4%. This decrease in core inflation supports the case for potential rate cuts, illustrating the significant impact of essential goods on inflationary pressures.

Labor Market Dynamics

Labor markets remained mostly steady to higher throughout Q2, with payroll gains of 206,000 in June, 272,000 in May, and 175,000 in April. However, the unemployment rate rose to 4.1% in June, the highest since November 2021. This increase suggests that the Federal Reserve's rate hikes may be starting to dampen economic activity.

Federal Reserve Policy

The second quarter included two Federal Reserve policy meetings, both of which resulted in unchanged interest rates, maintaining a target overnight lending rate of 5 - 5.25%. Market expectations indicate a high probability of no rate cut in July and a potential 25-basis-point cut in September.

Bond Market Trends

Slowing inflation data and expectations of Fed rate cuts led to a decline in Treasury yields by over 30 basis points from their April peak, ending Q2 near 4.37%. This decline resulted in price appreciation for bonds, with the Morningstar Core Bond Index gaining 0.17% and high-yield bonds adding 1.07% for the quarter.

Technology and AI: Sector Performance

Technology and AI sectors continued to outperform, with the technology sector rising by 11.40% in Q2. AI-fueled gains were a dominant narrative, driving substantial investment inflows.

Other Sectors

• Basic Materials: -5.88%
• Communication Services: +9.16%
• Consumer Cyclical: -1.20%
• Utilities: +4.48%
• Industrials: -3.41%

The divergence in sector performance underscores the importance of strategic diversification in investment portfolios.

Bonds and Fixed Income: Investment Strategies

Despite recent challenges, bonds may present a generational buying opportunity, especially if inflation continues to decelerate. The extended drawdown in the bond market suggests potential value for smart money looking to capitalize on fixed-income assets.

Dividend Stocks: Investment Strategies

Dividend-paying stocks, lagging behind trendier sectors, may regain favor if interest rates decline. Established companies like Coca-Cola, Disney, and 3M remain robust investment options for those seeking stability.

Final Thoughts

As we transition from Q2 to Q3, attention will remain on inflation data and Federal Reserve communications. Diversification and a long-term focus are crucial for navigating market volatility and achieving investment success. For personalized advice and to discuss your investment strategy, contact Stanton Advisory Group today.