June 2024 Newsletter

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June 2024 Market Insights

As we step into June 2024, investors are keenly observing the stock market to decipher potential trends and opportunities. With a robust performance in 2023, many are wondering if this momentum will sustain through 2024. From AI stocks to the impact of the November elections, several factors will shape the market’s trajectory. This article delves into the top stock market predictions for June 2024, offering insights that every investor needs to know.

Key Takeaways

• AI stocks are expected to continue their upward trend, driven by advancements in technology and increasing adoption across industries.
• The ‘Magnificent Seven’ stocks, which saw significant gains in 2023, are likely to remain influential in the market.
• Fluctuating Treasury yields will play a crucial role in shaping investment strategies and market performance.
• Economic performance indicators will be closely monitored, with potential slowdowns and recoveries impacting stock valuations.
• The November elections will add a layer of uncertainty, influencing market sentiments and investor decisions.

1. Economic Performance

Q2 Update: 2024 Outlook for the Stock Market and Economy

The global economic landscape for 2024 is expected to show a shallow U-shaped recovery in economic and earnings growth. This is in contrast to the V-shaped recoveries seen in the 2008-09 and 2020 recessions. Our latest forecast is 2.2% for full-year 2024.

U.S. Economic Growth

U.S. economic growth is projected to slow down considerably in the fourth quarter of 2023 compared to the third quarter’s 5.2% annualized increase. However, a contraction is unlikely. Factors such as the war in the Middle East, government shutdown, and the UAW strike are expected to exert only modest and short-lived headwinds to growth.

International Performance

As the global economy transitions to a new cycle, markets are experiencing new leadership. In 2023, the average international stock outpaced the average U.S. stock through late November. The MSCI EAFE Equal Weight Index, where each stock in the index gets an equal weighting, has shown significant outperformance.

• It’s crucial for investors to look beyond the performance of just a few U.S. stocks to see the bigger picture of international outperformance.

2. November Election Impact

Presidential Election and Market Sentiment

The November election comes with a lot at stake, from control of the White House and Congress to state legislatures, governorships, and other centers of power. It is also interesting to note the equity market’s performance while anticipating the election’s outcome. The S&P 500 typically outperforms in presidential election years when the incumbent party wins. This trend suggests that if the economy and markets are performing well, voter sentiment is likely behind the sitting president.

Historical Performance

Since 1952, the S&P 500 has never had a down year during a presidential reelection year. The only exceptions were in 1960, 2000, and 2008, years when both parties offered new presidential candidates. In fact, the S&P 500 has averaged a 12.2% gain during those re-election years.

Market Predictions for 2024

Stocks tend to climb in election years. According to the Stock Trader’s Almanac, the stock market has a long history of outperformance in presidential election years and even the preelection years. This is a plus for the 2024 stock market forecast, as democratic president Joe Biden and republican former president Donald Trump are expected to secure their respective party’s nominations at this summer’s conventions.

The stock market has a long history of outperformance in presidential election years and even the preelection years, according to the Stock Trader’s Almanac.

3. High Inflation

Persistent Inflationary Pressures

One of the most significant risks is the potential for sticky inflation and higher interest rates. Inflation readings to start the year have surprised to the upside with month-over-month core CPI averaging 0.4% during the first three months of the year. This equates to a three-month annualized core CPI rate of 4.5%, indicating that inflation may remain higher for longer than expected.

Historical Context

Each time the Fed loosened monetary policy too soon, it weakened its credibility and allowed increasingly high inflation expectations to become entrenched in the economy. This is why Paul Volcker was forced to raise the federal funds rate to more than 20% to end the Great Inflation from 1979 to 1981. In 2024, the Federal Reserve is unlikely to repeat this mistake if only because many of the FOMC members, including Chair Jerome Powell, remember the costly consequences.

Current Economic Indicators

On Dec. 12, the consumer price index showed that core prices firmed up a bit in November on hot services prices, though cheaper gas contributed to a drop in the CPI headline rate. Even if inflation continues to trend down in 2024, prices remain high for consumers. To make sure the embers of inflation are out, the Fed seems reluctant to cut rates too soon. But as Powell noted, monetary policy must take into account the risk of tightening for too long.

Housing is really the last shoe to drop on inflation. The other big contributor, obviously, is wage growth, which is important across the board, but especially for core services excluding housing. Our composite measure of wage growth was 4.7% year-over-year in the fourth quarter of 2023. That’s still a bit higher than consistent with the Fed’s 2% inflation target. Based on our productivity growth assumptions, we believe that 3.5% wage growth would be consistent with the 2% inflation target.

4. Rising Protectionism

Economic Impact

Wealthy countries are hunkering down economically. Any rise in protectionism, increasing tariffs, or a shift in industrial policy would add significant risk to the stock market. Rising trade protectionism poses a silent threat to the US economy, potentially leading to market distortions in certain sectors.

Global Trade Dynamics

“The retreat from globalization threatens to undermine the economic growth and wealth generation that free and unhindered trade has facilitated,” says Deiya Pernas, co-founder of Pernas Research. Despite the slowdown in global integration, there’s cautious optimism that nations will find mutually beneficial ways to cooperate, maintaining a degree of global economic stability.

Investor Strategies

Investors should be aware of the potential risks associated with rising protectionism. Consider diversifying portfolios to include sectors less likely to be affected by trade barriers. Additionally, staying informed about policy changes and their potential impacts can help in making more strategic investment decisions.

The specter of stubborn inflation, a less accommodating Fed, and higher interest rates present a significant headwind for equities should they come to fruition.

5. Fed’s Response

Interest Rate Decisions

Federal Reserve monetary policy remains a wild card for 2024. Fed Chair Jerome Powell’s comments after the December policy meeting suggested the rate-hiking cycle is over and that up to 75 basis points—or three quarters of a percentage point—in policy rate cuts are possible in 2024. Market participants continue to underestimate the resolve of the Federal Reserve to tame inflation decisively.

Historical Context

Each time the Fed loosened monetary policy too soon, it weakened its credibility and allowed increasingly high inflation expectations to become entrenched in the economy. This is why Paul Volcker was forced to raise the federal funds rate to more than 20% to end the Great Inflation from 1979 to 1981. In 2024, the Federal Reserve is unlikely to repeat this mistake if only because many of the FOMC members, including Chair Jerome Powell, remember the costly consequences.

Scenario Analysis

The Fed shifts talk to ‘scenarios’ as policy grows less certain. Kohn saw scenario analysis as a way of “reducing the focus” on Fed officials’ quarterly projections for growth, joblessness, inflation, and the appropriate policy path.

“Don’t fight the Fed” is a common mantra in the investing world. It will be the case in 2024 as well.

Market Implications

• Potential rate cuts totaling 75 basis points in 2024
• Continued vigilance against inflation
• Impact on borrowing costs and investment decisions

6. AI Stocks

Key Players

Key AI stocks include the Magnificent Seven, along with C3.ai (AI) and Palantir Technologies (PLTR). The Magnificent Seven — Amazon.com (AMZN), Alphabet (GOOGL), Apple, Meta Platforms (META), Microsoft, Nvidia, and Tesla — shouldered most of the stock market performance in 2023.

Market Trends

We believe a theme in 2024 will be less about AI’s ‘creators’ and more about AI’s ‘adopters’ — across the spectrum of industries and sectors — as companies increasingly focus their capital spending on productivity-enhancing investments.

Investment Outlook

While it’s impossible to make a stock market forecast with certainty, some of the major themes in 2023 will carry over to the new year and influence stock performance. Fluctuating Treasury yields, economic performance, the rise of generative artificial intelligence, and the so-called Magnificent Seven stocks will continue to play major roles in 2024.

One theme we believe will shift from 2023 to 2024 is around artificial intelligence (AI). AI has both captured investors’ hearts and minds, and contributed to the outperformance of both the Magnificent 7 and technology stocks more broadly—but in conjunction with narrow market performance.

7. Magnificent Seven Stocks

The Magnificent Seven stocks have been a significant driving force behind the stock market’s performance. As of December 15, these stocks contributed more than two-thirds of the S&P 500’s return for the year. Representing about 30% of the S&P 500’s market value, their combined weight is unprecedented in the index’s history.

Performance Overview

In 2023, the Magnificent Seven stocks showed remarkable gains:

Market Attention

Even with market breadth widening, the Magnificent Seven should command much of the market’s attention and performance. For now, most of the seven are in good shape; however, cracks are starting to show. Apple is below its 50-day line, while Microsoft and Nvidia remain in buy ranges. Alphabet and Amazon are below their latest buy points, while Tesla is nearing a new buy point. Meta is extended from its breakouts.

Future Outlook

Where can the Magnificent Seven stocks go in 2024? While they have been driving stock returns, it’s crucial to consider that past performance may not necessarily predict future results. Investors should stay informed and be prepared for potential shifts in market dynamics.

8. Treasury Yields

Treasury yields have been on a rollercoaster ride throughout 2023. The 10-year Treasury yield has fluctuated significantly, ranging from a low of 3.25% in April to a high of 5.02% in October. This volatility is expected to continue into 2024 as markets digest growth and inflation data.

Current Trends

The interest-rate sensitive 2-year Treasury note yield, currently around 4.76%, was forecast to decline 36 bps to 4.40% by end-June, and then to 4.10% and 3.69% by the end of the year. This suggests a potential easing in the short-term rates as the year progresses.

Economic Indicators

Treasury yields tend to rise when the economy appears to be strengthening and fall when economic growth appears to be slowing. The recent rise in yields has been attributed to resilient inflation, which increases the potential for a ‘no-landing’ scenario where the Fed is forced to maintain rates higher for longer.

Investment Strategies

Given the current environment, diversifying alternatives take center stage as bond yields fall and interest rate volatility spooks investors. Falling interest rates make for attractive bond returns, but the path may not be straightforward. Investors should consider underweighting corporate bonds, both investment-grade and high-yield, as the risk-reward ratio does not seem favorable at this point.

The decline in bond prices as yields went up was more than enough to offset the amount of yield carry over the first quarter. This highlights the importance of strategic allocation in the current market environment.

9. Mega-cap Weakness

Exposure to AI

Large, thriving companies with exposure to artificial intelligence have dominated in recent years. Any sign of a slide by so-called Magnificent Seven stocks may drive Main Street investors to the exits.

Impact on Indexes

The seven mega-cap stocks, which make up about 30% of the cap-weighted S&P 500, have prevented the S&P 500 index from underperformance in 2023. However, they are not immune to the business cycle and can also be a drag on cap-weighted indexes. This underscores the importance of diversification when it comes to the mega caps and the rest of the market.

Historical Context

The stock market still miscalculates the Fed’s determination to maintain its hawkish position. This creates conditions modestly more conducive to a financial panic. Moreover, there is precedent from periods similar to the one we are in that suggest a soft landing is less likely than a hard one.

The reason many investors haven’t noticed the outperformance of international stocks is that the seven mega-cap stocks have prevented the S&P 500 index from underperformance in 2023.

10. Falling Consumer Confidence

American consumers are losing confidence in the U.S. economy, and any further slide could trigger a stock market stampede to the sidelines.

Current Trends

In April, consumer confidence slid to its lowest level since mid-2022, according to a Conference Board report. Confidence retreated further in April, reaching its lowest level since July 2022 as consumers became less positive about the current labor market situation and more concerned about future business conditions, job availability, and income.

Impact on Stock Market

A decline in consumer confidence can lead to reduced consumer spending, which in turn affects corporate earnings and stock prices. This could result in increased market volatility and a potential downturn.

Future Outlook

Despite April’s dip in the overall index, optimism about the present situation continues to more than offset concerns about the future. However, the uncertainty of the disinflationary process and weakening consumer spending and labor market fundamentals could pose challenges ahead.

The stock market still miscalculates the Fed’s determination to maintain its hawkish position. This creates conditions modestly more conducive to a financial panic.

Key Indicators to Watch

• Consumer Confidence Index (CCI): A monthly survey of U.S. consumer attitudes, spending plans, and expectations for inflation, stock prices, and interest rates.
• Labor Market Data: Job availability and income levels.
• Corporate Earnings Reports: Reflecting consumer spending patterns.

Conclusion

Investors should closely monitor consumer confidence levels as a key indicator of economic health and market stability. A continued decline could signal broader economic challenges and necessitate strategic adjustments in investment portfolios.

Conclusion

As we look ahead to June 2024, the stock market presents a mixed bag of opportunities and challenges. While the first half of the year may see a slowdown in growth, experts are optimistic about a rebound in the latter half. Key factors such as fluctuating Treasury yields, economic performance, and the rise of generative artificial intelligence will continue to shape market dynamics. Additionally, the upcoming November election adds another layer of complexity to the market outlook. Investors should stay informed and agile, leveraging expert insights to navigate the uncertainties and capitalize on potential gains. By understanding the key predictions and market trends, investors can make more informed decisions and position themselves for success in 2024.

Frequently Asked Questions

What are the key stock market predictions for June 2024?

The key predictions include trends in AI stocks, the performance of the Magnificent Seven stocks, fluctuating Treasury yields, economic performance, the impact of the November election, high inflation, rising protectionism, the Federal Reserve’s response, potential weakness in mega-cap stocks, and falling consumer confidence.

Will AI stocks continue to perform well in 2024?

While it’s impossible to predict with certainty, AI stocks are expected to remain influential in the stock market due to ongoing advancements and applications of generative artificial intelligence.

What are the Magnificent Seven stocks?

The Magnificent Seven stocks refer to a group of high-performing technology companies that have shown significant growth. They are expected to continue playing a major role in the stock market in 2024.

How might the November election impact the stock market?

The November election could add another layer of uncertainty to the stock market, influencing investor sentiment and potentially causing fluctuations depending on the election outcomes and policies proposed by the candidates.

What is the outlook for Treasury yields in 2024?

Treasury yields are expected to fluctuate in 2024, influenced by economic performance, inflation rates, and the Federal Reserve’s monetary policies.

How can investors prepare for potential high inflation in 2024?

Investors can prepare for high inflation by diversifying their portfolios, considering inflation-protected securities, and staying informed about economic indicators and central bank policies.