Second Quarter Market Commentary

Technology Leads Again

The S&P 500 added another 4.3% in the second quarter, bringing the year-to-date return to 15.3%. Unlike the first quarter, where positive returns were broad-based, six of the eleven sectors declined, led by Materials (-4.9%), Industrials (-3.3%), and Real Estate (-2.8%). The majority of positive returns were driven by Information Technology (+13.6%) and Communications Services (+9.1%).

While large-cap US stocks performed well, most other equity segments did not follow suit. The S&P Midcap 400 (-3.5%) and Russell 2000 (-3.3%) fell markedly but finished the first half in positive territory for the year, up 6.2% and 1.7%, respectively. Global equities generally performed well, though the EAFE Index gained only 1% compared to Q1’s strong 10.0% gain.

Fixed income delivered mixed results. The Bloomberg U.S. Aggregate Index eked out a small gain (+0.1%) after declining in the first quarter. T-Bills gained (+1.3%), while T-Bonds declined (-1.8%), likely reflecting ongoing uncertainty about inflationary pressures and the timing of the Federal Reserve’s planned interest rate cuts.

Rate Cut Expectations Lessened Further

Last quarter, we discussed the inflationary tug-of-war and noted that the number of expected interest rate cuts had fallen from six to 3.4 by the end of March. Expectations for rate cuts continued to moderate in the second quarter, and we exited Q2 with just 2.3 cuts and a Fed Funds rate of 4.8%. The Federal Reserve Board continues to stress data dependence and the need to remain flexible, a policy we wholeheartedly endorse.

The Election Cycle Looms

The upcoming U.S. election will undoubtedly shape much of the narrative about the economy and capital markets in the second half of the year. Market strategists and economists have analyzed the impact of elections in every imaginable way, and you can expect to see and read countless opinions about potential economic winners and losers depending on election outcomes.

For example, the market strategy team at Ned Davis Research provided a look at how US equities have faired historically under different political regimes.

While historical context is valuable, no two election cycles are the same. We’ve found it best to put campaign rhetoric and outside opinions aside and focus on fundamentals. Currently, economic growth remains above recessionary levels, inflation is moderating but will remain volatile, and corporate earnings are set to grow at a healthy clip, based on consensus estimates. After the election, as Federal policies on taxation, interest rates, the dollar, regulation, foreign trade, and social issues become clearer, we will analyze their impact and adjust portfolios appropriately.

A balanced portfolio approach is designed to navigate all phases of the market cycle, and we remain committed to building and managing diversified portfolios that will serve you well over the coming years and decades.

As always, should you have any questions or concerns, feel free to reach out to us.

Jason B. Wood

Executive Vice President and Chief Investment Officer

Rothschild Capital Partners

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