July ‘24 Market Recap + Some August: Political fireworks and a dramatic rotation from large to small cap dominated the headlines over the past month. But, more recently to start August, the market went from “soft landing” to “late cycle” very quickly:
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- Earnings: Earnings very mixed, not universally bad, but more signs of weakness than in any other quarter since Covid,
- Magnificent Seven: Cloud vendors seem caught in an AI game theory trap. Completely unknown ROI, but the risk to underbuilding is huge if this is a huge long-term market, and the risk of overbuilding is limited given their balance sheets.
- The Fed: Now market is starting to take more seriously that the Fed has over-stayed their welcome and waited too long to lower rates (for International and US economies) – haven’t really had the “recession” narrative since early 2024, but seems to be creeping back into the market.
- Seasonality: We are entering a tough seasonal period for equities (August usually pretty flattish, then September and early October the weakest periods of the year.)
Small Cuts Can Make a Difference: Central bank policy rates can fall sharply in a recession (with large cuts occurring even inter-meeting). But that’s not the current base case. The goal now is to get from a restrictive to a neutral policy – smaller rate cuts may actually be preferable, if that means there’s no emergency. The current outlook for rate cuts looks more like a mid-cycle adjustment vs. the panic of a recession. With numerous central banks having cut rates and others (e.g., the U.K.) likely close, there are already some green shoots developing in global demand. There’s evidence that even small rate cuts (and the anticipation of such policy when it comes to the Fed) can matter. In fact, they may be desirable (e.g., Fed policy in 1995).
Small vs. Nasdaq Performance: On July 10, the Nasdaq was +23% YTD and the Russell was +1%, a 22% spread in favor of the Nasdaq. In the following 11 trading days, boosted by the CPI print on July 11, the Russell has outperformed the Nasdaq by 19%. That’s a 5.5σ move and the largest since 2000. At the end of the month, the R2K was at parity with the NDX on YTD performance. But, as many of us already know, August has had an auspicious start for Small Caps, reversing a lot of this move.
The Caveat to Rate Cuts: The Fed reached its peak overnight rate in July of last year (13 months now), but keep in mind it was stuck for 15 months in 2006/2007 before a slowdown was evident, and ~20 months for job losses to become consistently negative. For those who don’t know, 2006/2007 looked like a soft landing too, for a while. Obviously, the imbalances in the economy are much more benign today than in 2007, but it just goes to show, inflation cooling and rates coming down doesn’t always mean equities just rally endlessly, due to the lagged impact of higher rates on the economy. At some point, earnings may become a bigger fear as the year progresses as the full impact of the rate cycle simply has not yet been felt. But for now, the equity market wants a soft landing, and no obvious reason to fight this trend until earnings trends weaken.
Consumer Continued: There’s about ~$5T in retail savings/money market accounts in the US. Just two years ago, these were earning zero percent. With higher rates, they are now pouring ~$250B annually into the pockets of generally high-income/high-net-worth consumers. So as the low end continues to struggle, the high end has had an offset to higher rates. But we are now lapping peak rates, so YoY, there is no longer an incremental ~$250M YoY entering the economy from higher interest income (we’re lapping it). We’re not sure if it matters or whether this will mean more of the rate hikes will show up in slowing at the macro level, but it’s clearly been one of the reasons the economy has been more resilient than typical to higher rates. By the way, that’s ~1.5% of consumer spending annually.
Gotta Mention Politics → Joe Biden Bows Out: History tells an unfortunate tale of VPs running for the presidency when their boss is ending his term. George H W Bush was the first sitting VP to win since Van Buren in 1836 — both following a popular president. Therein lies the tale. In our opinion, sitting VPs lose because they are not viewed as strong enough candidates to win the nomination or, if they do win, they become a vote on the prior president in the general election, a president whom the public has tired of (Nixon ’60, Humphrey ’68) VPs who did win, Nixon and Biden, were four to eight years removed from office. Other VPs became president because the sitting president died and then won – Roosevelt, Coolidge, Truman, and LBJ.
The Presidential Election Year: Since ‘44, the S&P 500 has not declined in a year in which an incumbent president was running for re-election (avg. return of 16%). Stocks have declined in presidential election years, but in each of those cases, it was a year in which there was an open election with no incumbent running (‘60, ‘00, and ‘08). Presidents want to be re-elected and will use whatever policy levers are needed to boost the US economy. In fact, every president who avoided a recession two years before their re-election went on to win the election. And every president who had a recession in the two years before their re-election went on to lose. As of July, the incumbent is no longer running for president, but that doesn’t mean that the tool chest of liquidity will not be utilized to insulate the market, in case volatility shows its unwelcomed face.
S&P 500 EPS: ’25 (Exp.) EPS = $280. ‘24 EPS = $244 (+10.9%). 2023 = $220 (+0.5%). 2022 = $219 (+7.4%). 2021 = $204.*
Valuations: S&P 500 Fwd. P/E (NTM): 21.1x, EAFE: 14.5x, EM: 11.9x, R1V: 16.6x, and R1G: 27.8x. *
*Source: Bloomberg and FactSet, Data as of 07/31/24
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The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 11.2 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 4.6 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
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