Coming into summer of 2024, growth stocks like the "Magnificent 7" (Apple, Microsoft, NVIDIA, Alphabet/Google, Amazon, Meta, and Tesla), continued to support equity markets, while value stocks, mid-caps, and small caps struggled to adapt to higher interest rates. On the fixed income side, bonds remained flat, with longer-duration bonds rallying slightly in anticipation of a potential rate cut in the fall.
Fast forward to today and this potential for multiple rate cuts, has finally led many underappreciated stocks/sectors to reflate and pull their weight in the major indexes. In just the last three weeks, we’ve seen signs of a rotation from growth into: value, small-cap, and mid-cap stocks.
Below are the returns for different asset classes through the first half of 2024:
- S&P 500: 14.5%
- Tech-Heavy Nasdaq: 18%
- Small Caps (IWM Index): 1%
- Mid-Caps (MDY Index): 5.34%
- Dow Jones (Mostly Value and Blend stocks): 3.79%
Now, here are the returns as of 7/30/24
- S&P 500: 16.56%
- Nasdaq: 13.65%
- Small Caps (IWM Index): 11.55%
- Mid-Caps (MDY Index: 11.3%
- Dow Jones: 8.03%
As you can see, the laggards have started to recover, and diversified portfolios have performed well, even with tech and large-cap growth companies stalling a bit. It’s of course possible that this is a head fake, but a good potential sign none the less. Healthy markets aren’t driven by a handful of companies, so this “broadening out” (if it holds) would seem to be a healthy marker looking forward.
From here, we are cautiously optimistic around markets. We’ve been overweight these under appreciated asset classes since the beginning of the year. Obviously, there is a major US election approaching, which will no doubt elicit many emotions that could lead elevated volatility. While we do not belittle all that has occurred over the past several weeks, we strive to take an unemotional approach when managing your assets. Below, I’ve included a list of data points from prior election cycle, which backs our stance of leaving emotion out of it.
- Since 1950, US stocks have averaged returns of 9.1% in election years
Source: Haver, FactSet, FMR. As of November 14, 2023.
-Over the past 20 elections, the S&P 500 has only been negative 12 months after the election twice. These two times, in 2000 and 2008, saw market crashes due to asset bubbles, not politics.
-A $1,000 investment in the S&P 500 made when Franklin D. Roosevelt took office would have grown to over $19 million by June 30, 2023. This period saw eight Democratic and seven Republican presidents.
-Lastly, and maybe most importantly, the market tends to be positive over the long-run no matter which party is in power. And in fact, there’s some evidence that divided government has historically correlated with stronger market returns—perhaps because government gridlock creates less policy uncertainty., but as you see in the chart below, a divided government is better in the long-run