As we look to the second half of the year, much of our focus is on market volatility. U.S. consumers seem to be spending slightly less than they had been. Despite the negative looking data, the current environment may be more reflective of normality than the pandemic years. Similarly, despite numerous factors that typically drive market fears, including economic data focus, shifting central bank expectations, worldwide elections, and heightened geopolitical conflicts, market volatility has remained unusually low in the first half of 2024. In the Emerging market countries (EM) and the European Union (EU). This leaves advisors in a position to both reassure their investors about the state of the markets and to begin preparing them for upcoming election news.
U.S. consumer crunch?
The American consumer has been strong since the pandemic. According to the San Francisco Fed, consumers depleted $2.1 trillion of pandemic savings in March but are continuing to spend, driving American GDP higher and making it the envy of other G7 nations.
However, things are finally trending downward as monthly consumer spending fell slightly, from 0.7% in March to 0.2% in April. Even retailers have sounded the alarm that customers are shrinking their spending. Credit card data shows paints a similar picture. According to Transunion, since last April around 440,000 credit card users have had their status downgraded to subprime.1
Despite the negative looking data, the current environment may be more reflective of normality rather than the pandemic years. The Fed’s benchmark rate is twice what it was in 2019, yet delinquency rates are lower than they were in 2017. A long period of low rates also allowed homeowners to refinance making their housing spend decrease and for those that own stocks they have seen a solid increase in their value. There is certainly no guarantee that there will be a soft landing, but there is no guarantee that a recession is imminent either.
By: Brandon Rick, Investment Analyst - Equity Research
Key election outcomes in EM and EU cause market gyrations
While global markets have so far digested and navigated a hectic election year well, in June, key electoral outcomes in Mexico and India, along with unexpected political developments in France created some local market gyrations. In Mexico, President Andres Manuel Lopez Obrador’s (AMLO) ruling party, MORENA, led by his protégé Claudia Sheinbaum, secured a landslide victory along with its allies. Mexican stocks fell over 6%, and the peso closed at its weakest against the U.S. dollar since November 2023 on fears that MORENA’s a supermajority in both the Chamber of Deputies and the Senate would enable the ruling party to enact sweeping constitutional changes, potentially aggravating the budget deficit. Markets recovered somewhat after it became clear that Ms. Sheinbaum’s coalition would be just short of the requisite 2/3 majority in the Senate.
In India, Prime Minister Narendra Modi’s party, the BJP, fell short of securing an absolute majority on its own as the opposition alliance, led by the Indian National Congress, made surprising inroads. As reforms undertaken by Mr. Modi’s government were a key reason behind market enthusiasm, it reacted adversely to the results. The regional equity benchmarks were down by around 6%, and the Indian rupee fell the most in a year against U.S. dollar. However, as the political dust settled and it became clear that the government would be able to secure the required majority thanks to a jittery alliance with regional parties, markets rebounded.2
In France, President Emmanuel Macron unexpectedly dissolved the parliament and called for a snap election after his centrist Together alliance was trounced by the far-right National Rally (RN) in June’s European Parliament elections. Euro and French equities corrected with strong selloffs witnessed in major French banks. While the early trends indicate a clear advantage for RN under Marine Le Pen’s leadership, at the time of writing, tactical alliances between the rival left and center electoral blocs appear likely to keep the far-right from forming the next government. Rating agency S&P Global, which recently downgraded France from AA to AA-, citing a deterioration in the country’s budgetary position, indicated that policies advocated by the far-right National Rally could further affect the country's rating. Markets rallied after it became clear that a hung parliament is the most likely outcome.3,4,5,6
While election-induced market volatility has generally remained local and has stabilized for now, given the wide dispersion of potential outcomes, particularly in the closely watched U.S. elections in November, we expect risks to remain elevated.
By: Navaneeth Krishnan, Vice President - Investment Analysis
Market volatility at four-year low
With the first half of 2024 in the books, market volatility has remained unusually low. This is despite a renewed focus on economic data, shifting central bank expectations, worldwide elections, heightened geopolitical conflicts, and other market events that typically drive market fears. The Cboe Volatility Index, or VIX, known as Wall Street’s fear gauge, closed the month of June at 12.44, but was at 11.86 as recently as May 21, its lowest level since 2019.
Helping to drive the lower volatility has been the continuous move higher for the S&P 500 Index, with narrow market leadership driven by stellar performance from a few mega-cap tech stocks. The largest 10 market cap stocks in the S&P 500 contributed 77% of the index gains in the first half. The S&P 500 hit 30 record highs in the first half of 2024 and has gone on one its longest stretches without a 2% pullback. However, not all stocks gains have been equal this year. Through June 30, 2024, the S&P 500 Index is up 15.29% in 2024, compared with 5.08% for the S&P 500 Equal Weighted Index. Some individual stocks have been met with heightened selloffs that hasn’t impacted the broader market. Nike (NKE) is the most recent mega-cap example of this, as the stock sold off 20% on Friday, June 28, its worst trading day in company history, but one that failed to make a dent in the broad market returns for the day.
If the lull in market volatility continues, 2024 has the possibility of being one of the lowest volatility years in recent history, potentially challenging 2017, which was an especially low volatility year. This may spell good news for stocks as the lower volatility will likely lead to further market gains. However, history has shown the market calm rarely lasts for long. Lower volatility often causes investors to take excessive risks leading to a market top or some other black swan event that drives widespread selling and spikes volatility. In the second half, will the market calm continue, or will volatility launch a surging return?7,8
By: Tim Murphy, Vice President, Senior Portfolio Manager
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