Monthly Outlook: July 2024

We’re halfway through 2024 already and for investors, at least, it’s been a pretty good year. US stocks (Russell 3000) are up 14.1%, and international stocks (MSCI All-World ex-US) are up 5.7%. Bonds are flat, YTD, but are coming back up after a small dip in April. Since all markets are in uptrends (using our trend following signals), we’ve been fully invested all year and have captured the gains that the markets have given us. Our iFolios 100 (all stock) composite is up +9.5%, YTD, and our iFolios 75 (75/25 blend) composite, is up +6.5%, YTD, for example. Our iFolios Long/Short composite is up +11.0%, YTD, leading the pack of our models, per usual.

But as we discuss often, averages don’t tell the whole story about markets and this year is especially noteworthy. In 2024, size matters. Mega-cap stocks, especially mega-cap US tech stocks, are vastly outperforming everything else. If you didn’t own the Top 10 tech stocks, you’re lagging.

Size Matters in 2024  

Halfway through 2024, one stock, Nvidia, has provided 30% of the entire S&P500 return. It’s a mega-cap ($3T value) stock and it’s up 148% this half-year! Add in other mega-cap stocks, Google, Microsoft, Meta, and Amazon, and they account for just over 50% of the S&P500 return. And yes, we own all of these because we own the index ETF that includes them.

Not only are the mega-cap stocks the best performers in 2024 so far, they “count” more because of their size and weighting in the indexes. The top 10 stocks in the S&P500 account for 37% of the whole index. The bottom 490 stocks, collectively, account for the remaining 63%.

For an added perspective, consider that the largest S&P500 company, Microsoft, has a market-cap of $3.2 trillion. (It’s virtually tied with two others, Apple and Nvidia). Compare that to the smallest S&P500 company, Whirlpool, with a market-cap of $6 billion. Microsoft is 500x bigger than Whirlpool! If Microsoft, Apple, or NVDA stock moves higher, it really impacts the S&P500 index. Even if Whirlpool stock rose 200%, it wouldn’t even have an impact on the index.

Let’s compare YTD returns of various markets. The S&P500, which most people consider to be “the market”, is dominated by mega-cap tech stocks as we just discussed and it’s up +15.2%. The equal weighted S&P500 (1/500th in each company) is only up 4.9%, by comparison. The Russell 2000 index is a basket of small-cap U.S. stocks, and it’s up +1.6% for 2024.

The same size phenomenon is happening in international stocks, to a lesser degree. The EAFE index, comprised of large companies in developed countries, is up +5.7%, while the international small-cap index is up +2.8%.

Why is this happening? Partly it’s a function of index funds and their market-cap weighting. As the index rises, investors buy more of it and that money goes more to the mega-cap stocks. The big get bigger, as a result. Also, perhaps by chance, the fastest growing sector, Technology, happens to have some very large mega-cap companies, as listed previously. Investors have poured a lot of money into the AI “craze” lately.

But markets tend to revert to the mean. Based on long history, it’s logical to expect small-cap stocks and value stocks to outperform large growth stocks soon enough. That could happen in two ways. Either large growth stocks correct and/or small-cap and value stocks rise more. We’ll see.

Recession Indicators Still Flashing Caution

Although markets are doing well and portfolio values are rising, we have to note that our recession indicators are still flashing caution for a likely recession in late 2024 and 2025. Our three key indicators have a nearly perfect track record for the past 50 years, so we take them seriously. 1) Unemployment rate has risen from a low of 3.4% to 4.0% today and is trending higher. 2) The 2yr/10yr yield curve is UN-inverting and has risen from -1.04% to -0.41% and is trending higher. 3) All interest rates have peaked, and the Federal Reserve has signaled they are done raising rates. Rates are now falling as inflation is declining and the economy is slowing.

We’ll monitor price trends across all markets carefully. If recession fears take hold, we’ll see it in new downtrends and sell signals. We don’t see that today, but NOW is the time to have a plan, and our clients are covered.