2024- First Half Recap

As always, don’t hesitate to reach out if you have any questions or need to discuss anything.

-Kevin

Market Insights: 2024 First Half Recap

Let’s cut right to the chase:  the stock market has had a great first half of the year.  The S&P 500 is currently up about 17% so far.  If it somehow stayed flat for the rest of the year and just kept that number it would still be a good year by any reasonable metric.  

The companies that make up the S&P 500 (ie, the biggest blue chip companies) have had strong earnings and revenue growth, and the gains have been across almost every sector (the one exception is detailed below).  The top performing sectors have been IT, Communications, and Financials.  

The top company so far this year has been Nvidia – driven by the recent surge in demand for everything related to AI.  In fact, the run-up in Nvidia stock has been so crazy (+161%) that its having a large effect on the numbers I quoted earlier.  The SP500 is a market-capitalized index, which means bigger companies have more weight. Nvidia, as the biggest company, has the biggest weight – and their big returns will be reflected accordingly.  

Below is the Dow Jones Industrial Average (DJIA) for the year.  The Dow is up a whopping 4.4% so far this year. Why? The Dow doesn’t include Nvidia and is missing those returns.  (The Dow is also price-weighted, instead of market cap-weighted.  I could write a long rant on how price-weighted indices are generally useless but I’m guessing very few of you would care.)  I only highlight this difference in case you come across conflicting news headlines: the Dow is having a mediocre/bad year, but the broader ‘market’ has been very good.

What comes next?

There are three major things to watch for in the next six months that could affect the market and economy.

1. Interest rates  The Fed dramatically increased rates from early 2022 until late 2023, and has kept them steady since then.  At the same time, inflation has come down drastically, though still slightly higher than they would like.  BUT – now comes the tricky part.  There’s an extremely delicate balance between keeping rates high to snuff out inflation and keeping them high too long and tipping the economy into recession.  
   At the beginning of this year most analysts expected multiple interest rate cuts, but at this point now we might only get one.  We’ll be looking for signs that inflation stays low and gives the Fed the leeway to cut rates.  Lower rates mean lower borrowing costs, which means businesses expand, people get more mortgages, builders make more houses, they buy more supplies, etc.   There are still four meetings left this year – in July, September, November and December.  I wouldn’t expect any cut to come until November, barring any unforeseen drama.  What would drama look like?  A jobs report showing hiring slowing or a lot of companies announcing layoffs, which would indicate that the Fed needs to act to stimulate things back to a better place.

2. First Half Bubbles   Nvidia is probably currently a bubble stock.To be clear, I actually like AI. I try to find ways to use it to automate some repetitive tasks.  But regardless of what the product is, any time a company stock goes up 161% there are red flags to be raised.  That kind of growth is simply not sustainable.  That doesn’t mean it’s going to crash back down, but relying on those returns is probably a bad bet.  
   Similarly, one of the other top-performing sectors was Financials.  They’ve been enjoying high interest rates (read: high mortgage rates) but the party may be over soon.  Interest rate cuts will hurt profitability.  They also may have another problem: remember how I said earlier ‘almost’ every sector has been positive this year? There is one sector that has lost money this year: real estate.  This is mainly because of the ongoing problems with commercial real estate, which haven’t been able to find tenants in a new Zoom-world.  There are a lot of banks holding a lot of commercial real estate loans that could default or take writedowns, which would negatively affect their stocks.

3. Political Turmoil  I’m not sure if you guys have heard or not, but there’s actually an election this year. I know! I was surprised too.   Shetland Advisors is officially nonpartisan, so vote for whoever you like, but markets generally don’t like uncertainty.  I’ll do a future writeup on how various House/Senate/President alignments would affect future tax law, but depending on election results various components of the Tax Cuts and Jobs Act (TCJA) will either be extended or repealed.  Either case will result in lots of movement in November and December.

Conclusion

Things have been very good so far.  I have cautious optimism that that will continue – but we’ll keep monitoring things and keep you updated on major (and minor) developments that could indicate otherwise.

I hope you liked this first edition of our new format newsletter.  We’ll be aiming to get you an update approximately every two weeks, so don’t worry about us cluttering up your inbox.  If you have ideas for future topics you’d like us to address, please feel free to reply and let us know.