Last week provided quite a finish to the second quarter. Last week’s top story, of course, was the historic presidential debate, but given the news post-debate, and how the situation may be quickly evolving, let us simply break down the economic and market activity from last week for this report.
First, regarding economic news, the big release last week was the latest reading of the Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) index. The report was well-received by the markets — and rightfully so — as it revealed more easing in inflationary pressures. Core PCE grew at its slowest pace since March 2021. As for how the financial markets behaved last week, in the end, US stock and bond prices did move slightly lower. International stocks, however, did have gains.
More importantly, though, the second quarter ended. The last three months experienced a nice gain of over 4% for the S&P 500. We know, of course, that most of that gain came from a handful of the largest market cap stocks, including AI darling Nvidia. To highlight just how dominant those handful of stocks were to the stock market returns, it is interesting to look at the performance of the top 1000 stocks in the US stock market. Let’s break those 1000 names down into deciles based off of the size of their market caps.¹
Then, for each decile, we computed the equal-weighted performance for each. Two fascinating statistics jump out when you do so. First, when looking at performance within each decile of the market cap, only one had a gain last quarter. It was, of course, the one with the largest stocks. It is rare when the overall stock market benchmark is up over 4% when nine of ten deciles are down for the same period! Also remarkable is that even the top market cap decile only had a gain of less than 1% (again, each stock’s performance in those 100 names was equally weighted) — far below the 4%+ of the benchmark. Bottom line, it was a good quarter for the benchmark, but not a good quarter for the average stock.
Looking ahead, the biggest news in this holiday-shortened week could be what happens regarding the presidential election. It should be noted, however, that stock market volatility historically picks up in the months before the presidential election anyway. We are now set up for the same this year. The biggest economic report being released this week will be the latest update on the employment situation this Friday. Expectations are for about 200,000 jobs to be added and for the unemployment rate to stay at 4%. If unemployment comes in above 4%, and job growth well below expectations, will that finally prompt the Federal Reserve to cut rates sooner than later?
Something else notable to watch will be the performance of emerging market stocks. Emerging markets have been underperforming developed markets in recent years. That said, emerging markets outperformed the US stock market both last month and for the last quarter. Emerging markets have had significant relative valuations in their corner for years now. Could this recent outperformance be just another false start or the beginning of something sustainable?
In summary:
Stay invested. Stay diversified. Stay disciplined.
If you have any questions or comments, please let us know at strategists@brinkercapital.com or at rusty@orion.com. Thank you for your time and trust. See you next week!