GLOBAL MARKETS – THE STOCK MARKET RALLY CONTINUED
UNABATED
SeaCrest Investment Management, LLC
Global stock markets finished another quarter on a strong note. The S&P 500 Index
rose 4.3% while the Dow Jones Industrial Average fell less 1.3%. The NASDAQ
composite appreciated 8.5%. The MSCI All Country World Index rose 3% with the
Bloomberg U.S. Aggregate Bond Index ending unchanged. U.S. Treasury rates rose
marginally even as the yield curve remains inverted. The ten-year Treasury yield at
4.40% was 20 basis points higher at quarter-end versus the prior quarter while the
two-year Treasury yield at 4.75% rose 13 basis points. Our view has not changed,
despite the rally in bonds in 2024, the treasury curve inversion continues to bode
poorly for the economy in late 2024 and into 2025. The three-month U.S.T bill at a
yield of 5.37% is 103 basis points higher than the 10-year U.S. Treasury note
(narrowing 14 basis points from last quarter), historically a sign of a forthcoming
recession. So far, this time has been different, no recession on the horizon. But
signs abound that the economy is slowing.
The Federal Reserve’s next move will be to lower interest rates. While we await
with baited breadth, they continue to slowly reduce their bloated balance sheet,
down two trillion from the 2023 high water mark. The markets now believe the
FOMC will lower rates by year-end at least twice (50 basis points), down from
three times at last writing. We are inclined to believe the FOMC may reduce rates
one time this year, albeit after the election. Rising levels of inflation appear to
have abated though the current levels are far higher than the FOMC’s target of
two percent. That target is unlikely to be seen either in 2024 or even 2025. As we
have said ad nauseum, we have yet to see, in the face of today’s rate of inflation,
the FOMC tighten until they “broke” something. Could this mean a ‘soft landing’
for the US economy is in the offing? So far so good, but for the balance of 2024,
that is yet to be determined.
The third quarter of 2024 will bring new challenges to the economy and the
markets. The leading cause will be the anticipation of the election outcome in the
fourth quarter of this year together with a slowing economy and marginally higher
unemployment.
We believe market volatility in the coming months will be one of 2024’s legacies.
In 2024, market volatility has been obscured as many of the global equity
markets have been hitting new highs regularly. We continue to be concerned
about a global equity and fixed income market correction of even more
substance and more longevity than occurred so far in 2024. Valuations,
particularly those that are specifically technology related, are even more
elevated today than they were just last quarter. Some factoids for 2024: Seven
technology companies (known as the ‘Magnificent 7’) were responsible for 60%
of the SPX Index performance to date. Although the SPX index is up 15% year to
date: the average stock is up 4.1%. Tech and communications are 40% of the SPX
index. The Magnificent 7 comprise 33% of the SPX index. Six companies in the
SPX 500 index have market caps above $1 trillion while 406 companies have a
market cap below $1 billion. Technology related ETFs represent 40% of the ETF
market. Comparative valuations to the 1999/2000 overvalued equity markets
should not be ignored. While fixed income rates have risen this quarter, the
interest rate spread between investment and non-investment grade securities is
still historically narrow, still not reflecting realities in today’s economy. The dollar
ended the quarter near the same level against world currencies as it was at the
end of last quarter.
The impact of the war in Ukraine continues to confound the west, many grow
complacent in how this impacts the global economy today and even many
tomorrows to come. Middle east violence has ratcheted up this past year and
hopefully will be settled in the months to come without expanding to involve
more countries. The human and economic tragedies are reminiscent of past
periods of violence and war. These horrors continue to reverberate around the
world, caution is warranted even more today than earlier this year.
Our continuing search for and investment in undervalued assets requires patience
and a healthy dose of optimism for humanity.
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