Key takeaways
The stock market built on last year’s momentum during the first half of 2024.
The S&P 500 generated a total return of more than 15% in 2024’s first six months, though not all sectors of the equities market have participated in the rally.
Bond markets have struggled, as interest rates trend higher this year.
While the U.S. stock market set new record highs – led by a narrow band of large-cap stocks – in the first half of the year, many other S&P 500 sectors haven’t kept pace. And bond markets continue to face challenges as long-term interest rates linger higher for longer.
S&P 500 and NASDAQ Composite indexes continue to extend their respective bull market rallies, which date back to October 2022. As was the case last year, equities are led by tech stocks in 2024.1
So far in 2024, stock results have been widely divergent. Through June 30, 2024, the S&P 500 generated a total return of 15.29%. Meanwhile, the Russell MidCap Index gained a more modest 4.96%, and the small-cap Russell 2000 Index rose just 1.73%. International stocks also lagged the U.S. market.
After a period dating back to 2022 when interest rates moved up dramatically, the bond environment has recently demonstrated more stability. Federal Reserve (Fed) monetary policy is the main bond market driver. While investors anticipated the Fed would begin cutting interest rates earlier in 2024, the Fed has, to this point, held the line on the federal funds target rate it controls. Even though the Fed succeeded in its goal of lowering inflation from peak levels reached in mid-2022 (over 9%), the Fed has indicated that it remains concerned that inflation remains above 3%. Market reactions to Fed interest rate inaction moved yields on the benchmark 10-year Treasury note up and down over the course of the year’s first half.
The underlying economic environment remains positive, although growth as measured by Gross Domestic Product (GDP) slowed in 2024’s first quarter. GDP grew by an annualized rate of 1.4% over the first three months, down from 2023’s 2.5% growth rate.2 “1.4% is not a stellar rate of growth, but it’s still positive,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “As we look forward from here, most of the data points to a still-expanding economy.” The economic environment proved beneficial for equity markets, while inflation’s persistence created some challenges for bonds.
“The economy today can best be described as resilient,” says Eric Freedman, chief investment officer for U.S. Bank Wealth Management. Freedman attributes the economy’s ongoing expansion to persistent consumer activity. “Consumers have been spending more than most thought they would, and that has boosted corporate profits.” Freedman also notes the strength of business capital expenditure spending as a contributor to ongoing economic growth.
“The economy today can best be described as resilient,” says Eric Freedman, chief investment officer for U.S. Bank Wealth Management. “Consumers have been spending more than most thought they would, and that has boosted corporate profits.”
“The economy’s held up reasonably well to this point because of the strong labor market (unemployment at 4%3), and consumers’ fairly strong financial position,” says Freedman. “Our U.S. Bank economics teams believes these factors continue to help us avoid a recession in the near term.”
Still, with interest rates elevated, consumers and businesses face higher borrowing costs. That could slow economic activity as consumers reassess potential big-ticket purchases or businesses re-think capital expenditures. Yet consumers remain engaged. “The strong labor market and solid wage gains have given consumers the wherewithal to maintain enough spending activity to keep the economy on track,” says Haworth.
As was the case in 2023, much of the market’s strong 2024 performance can be attributed to technology-oriented stocks. Earlier in the year, leadership broadened out to other sectors, but in May and June, investors were increasingly focused on companies positioned to benefit from recent and projected advances in artificial intelligence (AI). “Below the surface of the headline numbers, there’s a fair amount of turmoil in equity markets today,” says Haworth. “To this point, most of the upside movement is about AI and the earnings growth it provides.”
In the fixed income market, Haworth says opportunities are more limited. “With the Fed holding the line on interest rates, bonds, especially among investment grade categories, had a negative start to the year,” says Haworth. “Fixed income investors may want to consider other options outside of traditional Treasury and investment-grade corporate bonds.”
Haworth says given the degree of uncertainty in the market, some may want to consider dollar-cost averaging as a way to effectively invest in equities. “By making regular investments over a period of time, you aren’t anchored to an investment at a single price; you stretch your investment out at different price points over time,” says Haworth. “It also gets you going on an investment plan so you can start growing your wealth now.”
Assets that are set aside to meet funding needs in the next 18 months should capitalize on today’s elevated interest rate environment by utilizing higher-yielding savings accounts, CDs and money market mutual funds.
“Be prepared to take what the capital markets offer given the current environment’s realities,” says Freedman. He advises that long-term investors consider positioning their portfolios with an above-neutral mix of equities and real assets (such as commodities), while reducing weightings in fixed income investments. Freedman adds, “It’s critical to have a financial plan that’s tied to the specific goals you hope to achieve.” With a plan in place, you can more readily identify investment strategies that align with your goals.
Based on your situation and goals, other portfolio strategies that can play a potentially contributory role in your portfolio include:
Discuss options with your wealth management professional and be sure to understand the risks associated with each of these investments. Determine whether any can help you more effectively diversify your portfolio.
Freedman adds it’s important to regularly review your plan with your wealth management professional. Determine whether there are opportunities to rebalance your portfolio in ways that more appropriately reflect your investment objectives, time horizon, risk appetite and the current market environment.
Have questions about the economy, markets or your finances? Your U.S. Bank Wealth Management team is here to help.
Note: Tax-loss harvesting does not apply to tax-advantaged accounts such as traditional, Roth and SEP IRAs, 401(k) and 529 plans. Private equity investments provide investors and funds the potential to invest directly into private companies or participate in buyouts of public companies that result in a delisting of the public equity. Investors considering an investment in private equity must be fully aware that these investments are illiquid by nature, typically represent a long-term binding commitment and are not readily marketable. The valuation procedures for these holdings are often subjective in nature. Private debt investments may be either direct or indirect and are subject to significant risks, including the possibility of default, limited liquidity and the infrequent availability of independent credit ratings for private companies. Structured products are subject to market risk and/or principal loss if sold prior to maturity or if the issuer defaults on the security. Investors should request and review copies of Structured Products Pricing Supplements and Prospectuses prior to approving or directing an investment in these securities. Investments in high yield bonds offer the potential for high current income and attractive total return but involve certain risks. Changes in economic conditions or other circumstances may adversely affect a bond issuer's ability to make principal and interest payments. Derivatives can be illiquid, may disproportionately increase losses and may have a potentially large negative impact on performance. Employing leverage may result in increased volatility. These investments are designed for investors who understand and are willing to accept these risks. Reinsurance allocations made to insurance-linked securities (ILS) are financial instruments whose performance is determined by insurance loss events primarily driven by weather-related and other natural catastrophes (such as hurricanes and earthquakes). These events are typically low-frequency but high-severity occurrences. In exchange for higher potential yields, investors assume the risk of a disaster during the life of their bonds, with their principal used to cover damage caused if the catastrophe is severe enough. The Standard & Poor’s 500 Index (S&P 500) consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The S&P 500 is an unmanaged index of stocks. It is not possible to invest directly in the index. Diversification and asset allocation do not guarantee returns or protect against losses. Past performance is no guarantee of future results.
In the current environment, investors might consider an overweight allocation to equities and real assets (primarily commodities) and an underweight allocation to fixed income. With the economy continuing to grow, equities are in a beneficial position. With persistent inflation, real assets offer some protection against the impact of higher costs. At the same time, fixed income investments are in a less favorable position in the short term given consistently high interest rates. As always, consult with your wealth management professional to determine the most effective investment strategy aligned with your own goals and risk tolerance.
Domestic large-cap equities have been the capital markets stand out performers in 2024. The market’s performance to date has been driven by technology-oriented stocks benefiting from investor enthusiasm about developments related to artificial intelligence. As was the case in 2023, other segments of the market have lagged the performance of technology issues. Investors can consider allocating a portion of their portfolio to an equal-weight S&P 500 index vehicle, which de-emphasizes the largest stocks represented in a traditional S&P 500 index. This creates a better opportunity to capitalize on the upside potential of what have been, to this point, underperforming sectors of the large-cap stock market, should the U.S. economy continue to grow. A solid economy should help boost company earnings for stocks that have not fully participated in the market’s rally to date.
In the short term, markets are unpredictable, and can experience short-term up-and-down movements. Investors need to position assets designed to meet long-term goals with a willingness to withstand some short-term market movements. In today’s market, stocks have enjoyed a solid start to 2024, but still could be subject to some volatility. Bonds lost ground so far this year as interest rates have moved higher compared to where they stood at the end of 2023. Although interest rates may be near a peak, bonds may not yet be positioned to experience a significant rally given that rates have remained high for an extended period of time. Be sure to consult with your financial professional to assess your own risk tolerance level, and position your long-term assets accordingly.
The Federal Reserve is focused on fighting inflation with monetary policy intended to slow consumer demand. Does this put the economy at risk of a recession?
Persistently higher prices continue to weigh on consumers and policymakers alike.
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