The US stock market continued higher in the second quarter, thanks to a healthy labor market and optimism around artificial intelligence technology.

In the second quarter, economic data showed the US labor market was healthy but cooling. Job openings were less available, while worker quit rates returned to their 2021 levels. ⁽²⁾ Despite these slowing numbers, the current level of job openings reflects reasonable market dynamics. The Federal Reserve, in its bid to curb inflation while maintaining full employment, has been the primary force behind the tightening labor market. Starting in 2022, the Fed raised interest rates at a historic pace and reduced the holdings on their balance sheet from $9 trillion to $7.2 trillion. The discontinuing of new asset purchases combined with a Fed Funds rate of 5.25% has helped slow the rate of inflation from 9.1% in June of 2023 to 3.3% as of June 2024. And while there is still work to be done, recent data suggests that a soft landing for the economy is still a viable outcome.

The excitement surrounding artificial intelligence (AI) was a leading catalyst behind stocks’ move higher in the second quarter. New companies were created to provide services using this technology, while existing data storage and database architecture companies, which are necessary for AI’s capabilities, became even more valuable. The computing power needed to run AI models has also led to innovation and investment in more efficient sources of energy. However, while artificial intelligence is giving rise to new businesses, existing companies are expected to find productivity enhancements from the technology. During the late stages of an economic cycle, companies look for ways to become more efficient. AI does exactly that by making information more available and basic tasks automated, and its impact is expected to grow for years to come.

JFG Outlook

Midway through 2024, Wall Street professionals once again failed to predict this year’s stock market performance. At the start of the year, the average analyst’s year-end estimate for the S&P 500 was 4,850, versus the 5,460 level at the end of the second quarter. ⁽³⁾ Six months remain, but it is a valuable reminder that an investment strategy should not rely on year-to-year analyst predictions, but rather, be grounded in a long-term vision. 

As we’ve noted in previous commentaries, the equity market remains expensive. The S&P 500 is trading at a 20% premium to its long-term valuation, creating risks that an economic surprise would derail these above-average valuations. However, a slowing but steady economy has not yet outweighed investor’s optimism around AI technology. Ultimately, when the next recession arrives, which barring a surprise we don't foresee happening in the near term, currently high valuations will not be justifiable.

Given the current interest rate environment, adjustments are warranted in investors’ bond allocations. Interest rates on high-quality bonds remain at decade highs, and these higher-rate bonds can provide safety against a recession. Credit spreads, or the premium given to high-quality bonds over a risky bond, remain at some of their lowest levels in decades. Historically, this is a bad signal for future risky bond prices which have poor credit quality. When risky bonds trade at high prices, they are pricing in an unusually high amount of optimism about the future economy. Our view in this late-cycle economic environment is to remain overweight in high-quality bonds and to continue rotating into intermediate bond maturities to hedge against the risk of a recession. 

Year-to-date performance in the market is positive, however, there will be plenty of market-moving events to come as we approach the November presidential election. It is important now more than ever for investors to know what they own, so they can act appropriately to whatever may surprise us next. 

Thank you for your continued trust in Juno Financial Group.

Sources

1. FactSet
2. JP Morgan’s Guide to the Markets
3. FirstTrust