Quarterly Market Update

In Q2 2024, both stock and bond markets suffered a rough start against the backdrop of stubborn inflation that dimmed the probability of two Federal Reserve interest rate cuts that the market had been expecting in 2024. However, as the quarter continued, the market envisaged a brighter outlook as monthly inflation figures began to print lower, alongside slowing employment metrics. In May, following a slightly cooler CPI report, the market picked up positive momentum which continued through June, resulting in positive quarterly equity returns. Now all eyes remain on the Federal Reserve and when they will begin their policy easing via rate cuts.

In equity markets, the continued dominance of the world’s largest GPU producer, Nvidia, fueled the growth of megacap tech stocks with NVDA alone contributing almost half of the S&P 500’s return. Additionally, as expectations for multiple rate cuts resurfaced, a lower implied discount rate on future earnings drove the upward moves of growth stocks. The Russell 1000 Growth gained 8.3% while the Russell 1000 Value contracted by 2.2% for the quarter. Outside of the US, Emerging Markets¹ (EM) gained 5.0% while Developed Markets² dropped 0.7%.

In fixed income markets, we saw yields moving up across the board with the 10-Year Treasury yield finishing 16bps higher, closing the quarter at 4.4%. Corporate High Yield (HY) credit spreads remained tight in Q2 at 318bps versus 312bps in Q1 2024.

CWB portfolios saw positive returns in Q2 2024:

• Portfolios with higher equity exposure generated higher returns mainly driven by Technology and Communication as the two sectors, within the S&P 500, were up 13.6% and 9.1% respectively.
• Portfolios with higher exposure to large cap and growth equities closed the quarter higher as mega-cap tech stock led the rally.
• Both Global³ and US Equities⁴ posted positive returns for the quarter, gaining 2.1% and 3.2% respectively. Non-US Developed equities⁵ were down 0.7% as inflationary pressure continued in developed countries, especially in the Eurozone. EM equities⁶ returned 5.0%, driven by a 12.8% increase in Taiwanese equities, as positivity surrounding Artificial Intelligence (AI) and semiconductors remained high.
• In the US, large cap outperformed small cap by nearly 7.0% (Russell 1000 Index rose 3.6% while the Russell 2000 fell -3.3%).
• In fixed income, Global Bonds⁷ decreased 1.1%, while US Investment Grade bonds⁸ saw a slight increase of 0.7% and municipal bonds⁹ were down 0.4% for the quarter.

As inflation starts to moderate, as demonstrated by two consecutive CPI reports coming in cooler than market expectations, the chances of a September rate cut have increased, alongside the probability of a soft-landing scenario becoming achievable. The question behind achieving this goal is, how many rate cuts is the Federal Reserve willing to administer?

In his most recent testimony with Congress, the Federal Reserve Chair Jerome Powell commented on the recent progress made in lowering inflation and cooling labor market as important steps in the right direction. The Fed Chair also shifted to a slightly dovish tone, expressing concerns surrounding holding interest rates too high for too long could jeopardize economic growth.

A widening valuation gap between the “Magnificent Seven” and the rest of the S&P500 could provide an attractive opportunity to broaden out US equity exposure to less crowded parts of the markets, as the seven megacaps were priced at roughly 34x earnings as of late May, compared to the remaining 493 stocks at 17x.

Unlike the Internet bubble we saw in early 2000, the bullishness around AI may advance from forecasts to facts as companies that have implemented AI in their businesses are witnessing improvements in their profitability. If this continues, industries such as data centers, power/utility companies, and cooling systems could all further benefit from increasing AI investment.

In Fixed Income, the “higher for longer” scenario pushed up yields over the quarter. In Q3, we could see yields come down on the back of lower inflation prints and a cooling labor market.

Looking at potential risks for the remainder of 2024, we continue to monitor the upcoming US presidential election. When paired with other geopolitical concerns such as the on-going wars in Ukraine and the Middle East, the second half of 2024 could experience bouts of market volatility. We remain optimistic on the forward looking outlook for returns and reiterate that especially during volatile periods diversifying your investment portfolio across asset class and maintaining a long-term perspective, while staying invested, is most optimal.