Market Recap 6/28/2024 Stocks End Quarter Mixed

U.S. stocks closed out a volatile second quarter on a mixed note, with the major indexes diverging as investors digested fresh inflation data and a flurry of corporate earnings. The S&P 500 slipped 0.1% for the week to 5,460.48, ending the quarter down 4% but still up an impressive 14.5% year-to-date. The tech-heavy Nasdaq Composite eked out a 0.2% weekly gain to 17,732.60, capping an 8% quarterly decline despite an 18.1% surge in 2024. The Dow Jones Industrial Average lagged, dipping marginally for the week to 39,118.86, down 2% for Q2 but up 3.8% on the year.

Key Takeaways

• S&P 500 dips 0.1% for week, down 4% in Q2 but up 14.5% YTD
• Nasdaq gains 0.2% weekly, falls 8% in Q2 despite 18.1% 2024 rally
• Dow slips for week, quarter, but holds 3.8% YTD advance
• Core PCE inflation cools to 2.6% YoY, boosting rate cut hopes
• Energy sector leads weekly gainers, up 2.5%
• Nike plunges 19% on weak guidance, rattling consumer stocks

Inflation Cools, Fueling Rate Cut Bets

The main catalyst for the week’s market action was the release of the May Personal Consumption Expenditures (PCE) price index, the Federal Reserve’s preferred inflation gauge. The core PCE, which excludes volatile food and energy prices, rose 2.6% from a year earlier, down from 2.8% in April and in line with economists’ expectations.

The tame inflation reading bolstered hopes that the Fed may be nearing the end of its rate-hiking cycle, with traders now pricing in a 64.1% chance of a rate cut by September. The prospect of easier monetary policy helped fuel a rally in rate-sensitive sectors like real estate and utilities, while also providing support for growth stocks that have been battered by rising borrowing costs.

However, the market’s reaction to the inflation data was tempered by concerns about slowing economic growth and the potential for a recession later this year. While consumer sentiment improved in June, with the University of Michigan’s index rising to 68.2 from 65.6, worries persist about the impact of higher interest rates on consumer spending and corporate profits.

Sector Divergence Highlights Market Crosscurrents

The week’s sector performance highlighted the conflicting forces at play in the market. Energy stocks led the way with a 2.5% gain, benefiting from rising oil prices and hopes for a pickup in global demand. Communication services also outperformed, climbing over 2% as investors bet on continued strength in digital advertising and streaming services.

On the flip side, materials and utilities both declined around 1.3%, with the former hurt by concerns about slowing industrial activity and the latter weighed down by rising bond yields. Other sectors like technology, consumer staples, industrials, healthcare, and financials saw mixed performances, reflecting the market’s uncertain outlook.

Corporate Earnings Paint Mixed Picture

Earnings reports continued to drive individual stock movements, with Nike’s disappointing guidance casting a shadow over the consumer discretionary sector. Shares of the athletic wear giant plunged 19% after the company cut its full-year forecast, citing inventory challenges and weakening demand in some key markets.

Other notable movers included Trump Media & Technology Group, which saw its stock (DJT) swing wildly following the first presidential debate, ultimately ending 6% lower for the week. Infinera soared 17% on news of its acquisition by Nokia, while Rocket Pharmaceuticals tumbled 6% after the FDA delayed approval for its gene therapy treatment.

In a notable shift, hedge funds sold U.S. technology stocks at the fastest pace since 2016 in June, according to data from Goldman Sachs. The sell-off was particularly pronounced in semiconductor stocks, suggesting growing bearishness on the sector despite its strong performance in the first half of 2024.

However, the picture wasn’t uniformly negative for tech, as hedge funds increased their positions in tech hardware and electronic equipment. This strategic repositioning within the sector highlights the nuanced approach many managers are taking in the face of evolving market dynamics.

Schonfeld, Man Group Shine Amid Volatility

While many hedge funds struggled to navigate the quarter’s choppy waters, some notable performers emerged. Schonfeld Strategic Advisors’ flagship fund ended the first half of 2024 up an impressive 10.3%, showcasing the firm’s ability to generate alpha in a challenging environment.

Meanwhile, Man Group continued to lean into alternative strategies, increasing its exposure to convertible arbitrage. This approach, which involves simultaneously holding long positions in convertible securities and short positions in the underlying common stock, is expected to benefit from the current market conditions of elevated volatility and divergent sector performance.

Conservative Investors

With inflation showing signs of moderating and the Fed potentially nearing the end of its tightening cycle, conservative investors may want to consider adding some duration to their bond portfolios. Look for high-quality corporate and municipal bonds with maturities in the 5-10 year range, which could benefit if rates start to come down. Dividend aristocrats and low-volatility ETFs can also provide stability and income in a choppy market.

Growth Investors

While the tech sector has faced some headwinds recently, long-term secular trends in areas like artificial intelligence, cloud computing, and cybersecurity remain intact. Focus on companies with strong balance sheets, sustainable competitive advantages, and reasonable valuations. Be prepared for near-term volatility, but don’t lose sight of the big picture.

Opportunistic Investors

The recent pullback in some areas of the market may present buying opportunities for patient investors. Look for quality companies that have been unfairly punished by sector-wide selling or short-term headwinds. Convertible bonds and other hybrid securities may also offer attractive risk/reward profiles in the current environment.

Our Take: Caution Warranted as Crosscurrents Persist

The market’s mixed performance in Q2 underscores the complex backdrop facing investors as we head into the second half of 2024. While cooling inflation and the prospect of Fed rate cuts provide reasons for optimism, concerns about slowing economic growth and potential earnings disappointments loom large.

The sharp divergence in sector performance and the rapid repositioning by hedge funds highlight the importance of staying nimble and diversified in the current environment. While the tech sector’s long-term potential remains compelling, the recent sell-off suggests that valuations may have gotten ahead of fundamentals in some areas.

At the same time, the strength in energy and communication services stocks points to pockets of opportunity for investors willing to look beyond the headline-grabbing tech names. As always, a balanced approach that combines exposure to both growth and value, as well as cyclical and defensive sectors, is likely to be the most prudent course for most investors.

Looking ahead, the upcoming earnings season will be crucial in determining the market’s near-term direction. With expectations high after the strong first-half rally, companies will need to deliver robust results and positive guidance to justify current valuations. Any signs of weakness or cautious outlooks could lead to increased volatility and potential downside.

The week ahead brings a holiday-shortened trading schedule, but there will still be plenty for investors to digest. The June jobs report, due out on Friday, will be the main event, with economists expecting another solid month of payroll gains and a potential tick down in the unemployment rate.

Other key data points to watch include the ISM manufacturing and services indexes, factory orders, and the JOLTS job openings report. These releases will provide important clues on the health of the industrial sector, consumer demand, and the overall labor market.

On the earnings front, a handful of notable companies are set to report results, including Walgreens Boots Alliance, Micron Technology, and Constellation Brands. While the bulk of Q2 earnings season is still a few weeks away, these reports could set the tone for what’s to come.

Finally, geopolitical developments will remain in focus, with ongoing tensions in Ukraine and the Middle East, as well as U.S.-China relations, all potential sources of market volatility. Investors should stay attuned to these risks and be prepared to adjust their portfolios as conditions evolve.

As we enter the second half of 2024, maintaining a disciplined, long-term approach will be key to navigating the market’s twists and turns. By staying diversified, focusing on quality, and remaining flexible in the face of changing conditions, investors can position themselves for success in an uncertain world.

Views expressed here should not be considered personal investment advice.

Sources:
Reuters
CNBC

Bautis

Investopedia