By Pete Biebel, Senior Vice President, Senior Investment Strategist
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Through the first six months of the year, the S&P 500 Index (SPX) has vaulted higher by more than 14%. The NASDAQ Composite Index (COMP) has cleared an even higher hurdle, gaining more than 18%. In the most recent months, COMP easily outran SPX. COMP sprinted nearly 6% higher in June, increasing its gain for the second quarter to more than 8%. In the other lane, SPX tacked on about 3.5% in June for a net increase of about 4% for the quarter. Both indices recorded gains in five of the six months this year and seven of the eight months since last autumn’s lows.
The impetus behind those gains has been the Dream Team, the small squad of mega-cap technology stocks that have been run-away winners this year. The performance of one stock, Nvidia Corp. (NVDA), has been responsible for about 40% of the increase in SPX year-to-date. Factoring in the contributions of four of NVDA’s teammates (Alphabet Inc., Amazon.com Inc., Meta Platforms Inc., and Microsoft Corp.), the crew is responsible for well over half of the increase in SPX this year. It’s analogous to a bicycle race stage in which a handful of riders is miles in front of the peloton. In contrast to the cap-weighted SPX’s recent gains, the equal-weight version of the index is up just 4.69% in 2024. It was up just 0.12% in June and had a net loss of 2.63% in the second quarter.
The Dream Team’s ball-hogging performance is reflected in the sector stats. The S&P 500 Information Technology Sector Index has scored a nearly 28% gain over the past six months, with about half of the gain coming in the second quarter, including about a 6% increase in June. The S&P 500 Communication Services Sector Index, which carries a heavy weighting in a couple of those mega-cap tech stocks, scored a six-month gain of just over 26%, with a +3.7% in June and a second-quarter gain of 9.4%.
Of the other nine sectors, eight are sporting year-to-date gains, though none of them is in double-digits. The S&P 500 Financials Sector got close having registered a 9.87% gain through six months. The sector gained a mere 0.3% in June, reducing its second-quarter loss to a little more than 2%. Only the S&P 500 Real Estate Sector put up an airball in the first half of 2024. Despite a recovery of about 4.5% in June, the sector is down about 3.5% for the year.
The pace of the market’s advance was a bit off-stride last week. SPX was strong coming out of the starting blocks last Monday morning, but the high bar it set in the opening 30 minutes would not be cleared until much later in the week. Compared to some of the sprints higher the market has run in recent months, last week was no track meet. The averages lumbered sideways through the middle of the week, perhaps in anticipation of Thursday evening’s presidential debate and Friday morning’s personal consumption expenditures (PCE) data.
But last week also featured a meltdown in one of the power-lifter stocks and a photo finish. On Monday, the market’s most important stock, NVDA, lost about 7.5% through the session. The stock had lost more than 15% since setting its personal best all-time high the previous Thursday morning. The three days of losses shaved about $300 billion off the company’s roughly $3 trillion market capitalization. The lost market cap was greater than the individual market valuations of about 96% of the S&P 500 stocks. The sudden weakness in NVDA contributed to widespread declines in the tech sector, which fell 2.6% that day. NVDA was able to rebound a bit over the balance of the week, and the tech sector was able to recover all but about one percentage point of its early-week loss.
The best news for the market week came Friday morning when PCE data for the month of May was released. The PCE price index, which is the U.S. Federal Reserve Open Market Committee’s preferred measure of inflation, was coming off a +0.3% reading for April reported last month. That was the highest month-over-month reading since last November. On Friday morning, the news was as good as, if not better than, expected. Headline PCE inflation for May came in at 0.0% with the year-over-year rate at +2.6%, down a tick from April’s +2.7%. Core PCE inflation, which ignores food and energy prices, was +0.1%, down from April’s +0.3% month-over-month level. Core PCE year-over-year was reported at +2.6%, down 0.2% from April, and the lowest reading since March 2021.
Following the PCE news, the averages all pole-vaulted higher. SPX and COMP both hit new all-time highs in the opening 45 minutes of trading. Unfortunately, before the first hour was in the books, the averages performed their rendition of the Fosbury Flop. The indices rolled over and trended lower into the close. The Dow Jones Industrial Average (DJIA) tripped the beams with just a 0.12% loss for the day. SPX lost 0.41% on Friday and COMP was down 0.71%. Net for the week, COMP squeaked out a 0.24% gain. SPX and DJIA finished in a dead heat; both were down 0.08% for the week.
Friday’s price action added another reason for concern. The three major indices all had key reversal days, or outside range reversals. These are generally seen as reliable technical warning signs. When a stock or index hits a new high but then rolls over and ends the day with a loss and below the previous day’s low, the market is telling us that we probably just saw at least a short-term high.
That key reversal day, combined with the extreme concentration of leadership and the market’s relatively rich valuation, are all hinting that the Olympic run the market has experienced over the past eight months may be due for a timeout. In order for the averages to extend their gains, the leading Dream Team stocks would need to pass the baton. We would need to see broadening participation across sectors and market capitalizations. But hopes of benefits from lower interest rates and an expanding economy are fading. In recent weeks, it seems that the market is beginning to worry that the economy is slowing.
The most important potential catalyst for broadening participation is likely the upcoming second-quarter earnings season which kicks off in two weeks. Analysts expect that the quarter will show 9% year-over-year earnings growth. That would be the strongest overall earnings growth in 2½ years.
SPX ended last week near 5460. As has been the case for several weeks, neither SPX nor COMP have any significant resistance overhead, but I expect that upside potential from here will be very limited. SPX could give back 1% or 1.5% without doing any technical damage. The index could easily settle back to around the 5375 level. That would take it back to the area of the early June highs and close the gap the index left in mid-June. Sustained trading below about 5300 would suggest that a more extended timeout was at hand.
All of the economic report fireworks this week will come after the Independence Day holiday when the nonfarm payrolls and unemployment data is released Friday morning. The initial unemployment claims numbers on Wednesday could spark a minor reaction, but the Fed minutes on Wednesday afternoon will likely be a dud. Expect a very thin audience on Wednesday and Friday.
| Economic Calendar (7/1/24 – 7/5/24) |
Previous |
Consensus |
|
| Monday 7/1/2024 | U.S. Manufacturing PMI, June |
51.7% |
|
| Construction Spending, May, M/M |
-0.1% |
+0.2% |
|
| ISM Manufacturing, June |
48.7% |
49.2% |
|
| Tuesday 7/2/2024 | JOLTS Job Openings, May |
8.1mm |
7.9mm |
| Auto Sales, June, SAAR |
15.9mm |
15.8mm |
|
| Wednesday 7/3/2024 | ADP Employment, June |
+152K |
+170K |
| Initial Jobless Claims |
233K |
235K |
|
| Continuing Claims |
1,839K |
||
| U.S. Services PMI, June |
55.1 |
||
| Factory Orders, May, M/M |
+0.7% |
+0.3% |
|
| ISM Services, June |
53.8% |
52.5% |
|
| FOMC June Meeting Minutes | |||
| Thursday 7/4/2024 | None Scheduled. Markets Closed. | ||
| Friday 7/5/2024 | Non-Farm Payrolls, June |
+272K |
+195K |
| Unemployment Rate, June |
4.0% |
4.0% |
|
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