The broad stock market indices continued to move higher in the second quarter, although the rally was again somewhat narrowly concentrated in large cap tech companies. The S&P 500, a market weighted index where the largest 6 stocks (Microsoft, Apple, Nvidia, Google, Amazon and Meta) constitute nearly 30% of the index of 500 stocks, was up 4.28% and 15.29% for the quarter-ended June 30th and for 2024 through June 30th, respectively. Amazingly, Nvidia alone contributed nearly a third of the S&P’s gain, or roughly 5% of the 15.29% gain so far this year. Its market capitalization increased $1.8 trillion dollars which is equal to the 2023 GDP or Australia! The disparity between the performance of growth stocks versus value stocks and large capitalization stocks (the S&P 500) versus mid and small capitalization stocks is highlighted in the table below:

Symbol	Description	Quarter	Year-to-Date
		Ended 6/30/24	Ended 6/30/24
COMP	Nasdaq Composite	8.47%	18.57%
SPXTR	S&P 500 Total Return	4.28%	15.29%
SVX	S&P 500 – Citigroup Value Index	-2.10%	5.79%
RSP	S&P 500 Equal Weight	-2.62%	4.96%
IWR	Russell Mid-Cap Index	-3.33%	4.86%
IWM	Russell 2000 Small-Cap Index	-3.25%	1.62%

To provide some perspective on the huge influence of the top stocks, the top 5 stocks as measured by market capitalization are now worth more than the entire S&P 500 index was on December 31st, 2012.

Warren Buffett has been quoted as saying that “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.” Momentum and investor sentiment can really move individual stocks in the short run. Companies like Nvidia have had remarkable gains during periods when they haven’t reported financial results and didn’t make any earth-shattering announcements. To make the purchases that drive up prices of certain stocks, investors, whether institutional, like hedge funds, or retail, like the guy with his broker’s app on his phone, are likely selling some out-of-favor stocks to purchase the market darlings, exaggerating the divergent performance between stocks and sectors.

While Nvidia, Microsoft, Google and the like are great companies and are deserving of increased market valuations based on extraordinary fundamentals over the last decade, momentum can cut in either direction. Many of these same stocks, and growth stocks in general, had great runs for a period through the end of 2021 before coming back to earth in 2022. Since the start of 2023 they have seen huge increases in valuations as investors are seeking companies that will be beneficiaries of the Artificial Intelligence revolution. I would not equate the lofty valuations of any of these companies with the companies that ran up during the dot-com frenzy of the late 1990s as this current group are great companies generating huge revenues and profits. That said, extreme divergences in valuations tend to reverse themselves over time.

In the short term, sectors and investment styles can have momentum in either direction based on investor sentiment, some of which have catchy acronyms like “FOMO” (fear of mission out) and “YOLO” (you only live once). Both FOMO and YOLO were prevalent during the Reddit WallStreetBets induced meme stock frenzy of 2021 when stay-at-home traders bid GameStop, a company with poor fundamentals and an iffy, at best outlook from the low single digit dollars per share to over $500 at the peak within just a few weeks. The stock has been trading in the $25 range recently. I present this as an extreme example of how a company’s stock price can be divorced from that company’s fundamentals. If you have interest, watch the movie “Dumb Money” which chronicles the GameStop saga.

I try to write these quarterly commentaries on the market and economy highlighting different themes and subjects each quarter, but the reality is that the economy has been chugging along nicely albeit with still higher than recent, but declining inflation rates for more than a couple of years and the messaging from the Federal Reserve on interest rates has really changed much. I’m struggling to find data or rationale for the economy to stall or the stock market to alter its recent trend higher with a continuing focus on growth and technology. I feel like the market had a similar feel in late 2021 as it had moved consistently higher for about 3 years, excepting the Covid market shock from which it quickly recovered. This complacency and lower volatility can often be a warning sign, but trying to time the market has typically been a losing strategy. Even if you get out at the right time, the market usually turns back up when things feel the worst so getting back into the market below where you exit is harder said than done.

The one potential market-moving entry on the calendar that is certain to happen is the November election. Several clients have expressed concern about how the outcome of the election could affect the markets, so it seems like a good time to discuss market performance in election years and under both Democratic and Republican presidencies. Basically, history tells us that it is best not to materially alter your investment strategy based on anticipated outcomes of elections as the market has performed well under both Democratic and Republican administrations since World War II. Control of the White House is but one of the ballot items to be contested. Control of the House and Senate are also up for grabs and meaningful economic policy in highly-partisan, divided government is typically difficult to pass. Investors seem to take comfort in divided government that doesn’t alter the status quo.

The economy and by association, the stock market is always among the most impactful issues during election cycles and candidates are hesitant to introduce policy that they believe would be contrary to investors interest, even if it were to be in the best long-term interest of the country. Sure, the deficit should be an issue, especially with the highest interest rates that we have had in decades. But given the increase in the deficit under the watch of both candidates’ presidencies, I haven’t heard a lot of talk about it from either Biden or Trump. Nobody wants to hear that taxes should be higher or there should be cuts in spending. Those cuts will affect some block of voters which can be the difference between winning and losing in what is expected to be a close election.

Fixed income markets seem to be in a wait and hold pattern until the Federal Reserve actually moves the federal funds rate. The wording in the Federal Reserve’s statements over the last several meetings has changed slightly but has not altered the market’s view meaningfully. As of now, one or two quarter-point rate cuts are anticipated through the second half of 2024.

Should you have any questions about the attached report, this email, your portfolio, or anything else related to your financial life, my line is always open.

Best regards,

Steve