The stock market logged a gangbusters first half of the year. Can it last?
The S&P 500 index gained a whopping 14.5% to close the first six months of 2024. The Dow Jones Industrial Average rose 3.8% and the Nasdaq Composite climbed 18.1%.
Like much of 2023, there's been one big driver behind those eye-popping gains: artificial intelligence.
Much of the S&P 500's gains were concentrated in the Magnificent Seven big tech names, while other stocks lagged behind. Nvidia, the leader of the pack, has pulled even further ahead. Shares of the chipmaker jumped 149% this year. Its valuation topped $3 trillion for the first time in June, when Nvidia was briefly the world's largest public company.
That's helped power the S&P 500 to 31 record high closes this year, despite hot inflation data derailing investors' expectations for when and how many times the Federal Reserve will cut interest rates.
Coming into this year, Wall Street projected that the Fed would ease rates as many as six times in 2024. But a stream of data showing sticky inflation forced investors to cool those bets, and the central bank has yet to pull rates back from their current 23-year high.
Now, investors expect the Fed will cut rates up to three times in 2024, according to the CME FedWatch Tool, though the central bank has only penciled in one.
Fresh data on Friday has given traders hope that inflation is on a downward path again. The Personal Consumption Expenditures price index, the Fed's favorite inflation gauge, slowed to 2.6% for the 12 months ended in May from the prior month. The inflation measure was unchanged from April, the first time it has held steady on a monthly basis since November.
What could be in store for the stock market during the second half of 2024?
Before the Bell spoke with Kevin Gordon, senior investment strategist at Charles Schwab.
This interview has been edited for length and clarity.
Before the Bell: Was there anything that happened this year that surprised you?
Kevin Gordon: I was surprised by the slight re-acceleration that we had in inflation and the fact that the market for the most part brushed it off. But again, even when you look down especially within areas that are more tied to the economy that are more cyclical in nature, like small caps in particular, there has been a lot of breakage under the surface.
I do think that it was a bit of a surprise to see the S&P 500 have a max drawdown of just 5.5% percent so far, even as you've had the Fed on hold for much longer than expected but also inflation having accelerated.
Do you think the stock rally's momentum can continue?
I think it can as long as the rest of the market starts to catch its breath.
Even though indexes like the S&P 500 and the Nasdaq have continued to make several all-time highs on a somewhat consistent basis, you've seen more breakage under the surface: A fewer percentage of companies that are in an uptrend and that are participating in those new all-time highs. That kind of divergence, if it persists then into the second half of the year, would be a more worrying sign because it would start to somewhat eerily mimic what we had in 2021 in the second half of that year, where you were still recovering from a bear market. You were also recovering from a recession in 2020.
It's not as extreme right now as we saw back then, but we're also in a hot investor sentiment environment. Frothiness has kind of come back in full force.
What are the risk factors to the stock rally?
The first one would definitely be any continued divergence in (market) breadth. The second one, though, would be if for some reason we did see a sharper slowdown in the labor market, and then that pushed the Fed to start an aggressive cutting cycle.
All Fed cycles are different to some extent, but the one thing that is a little bit more consistent is when you start to look at the pace of cutting in so-called fast-cutting cycles, when they're taking rates down by maybe more than 25 basis points per meeting or at every single meeting, that tends to be more consistent with a recession and weakness in the market. Vice versa, a slow-cutting cycle where they're cutting maybe a handful of times within a year, that tends to be more supportive for the equity market because they're doing it because they can, not because they have to.
Our view still is that it's probably going to be a slow-cutting cycle. That would broadly be supportive for the market, certainly supportive for the sectors that have been leading thus far. But I'd be on watch for any weaker labor data than (the Fed has) been expecting, which ultimately pushes them to either cut sooner and/or cut more aggressively. That's becoming a bigger risk factor that's come into focus.
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