It’s hard to believe that 2024 is already halfway over. It’s also hard to believe that the events of this year have just begun. With a contentious and widely discussed election happening in just a few months, let’s have a look at where markets stand today.
The first half of 2024 was the best first six months of an election year since the S&P 500’s 1950 inception. Keep in mind that there are only nineteen data points, but it is interesting, nonetheless. Given all the negative news out there, one would probably expect that the markets would be doing much worse.
But are the markets really doing all that well?
Technology Scores Big While the Rest of the Team Watches
Most major market indexes are up in 2024, but not by much. The S&P 500’s strong first-half performance has been led by large technology stocks. While the market index is up around 14%, the equally weighted S&P 500 is up less than 5%. It’s like leading a basketball game where one player has most of the points. If that player gets hurt, does the team have enough strength to keep winning? The good news is that the player is still on the floor and hitting shots.
In the second quarter of 2024, the Information Technology sector was up more than 8.50%. That sector represents 32% of the S&P 500. The Communications sector was up about 4% (9.3% of the S&P 500). More than half of the S&P 500 sectors were actually down for the quarter. While the S&P 500 was up +4% in Q2, the average stock was down about -2.5%.
Low Volatility Goes Even Lower
Low volatility is a sign of a bull market, but volatility can also become too low. When you have decreasing volatility over an extended period, it can be like the compressing of a spring. Eventually, pent-up pressure needs to be relieved.
Markets relieve pressure in the form of outlier days. According to Canterbury’s data and statistics, an outlier day is defined as any trading day that is beyond +/-1.50%. This is calculated by taking the daily standard deviation of S&P 500 trading days during a bull market, and then using bell curve math. Statistically, an outlier day should occur once every 20 days on average during a normal (rational) market year, which is about 10-20 outlier days per year for the S&P 500.
That means that through the first six months of this year, markets should have experienced roughly seven outlier days. However, markets only saw three. The last outlier day occurred back in April.
As a result, volatility has entered “extreme low” territory. While declining volatility is a positive characteristic for markets, extreme low territory heightens the probability of seeing an outlier day, in either direction. Most of the time, markets return to normal, rational fluctuations after an outlier or two have occurred in a bull market.
Bottom line, be on the lookout for an outlier day.
Other Notes
We continue to see weakness in the bond markets. The last few trading days have been volatile for bond funds. Year-to-date, 20-year treasury bond funds are down about -10%, while treasury note funds are down around -4% (sources: TLT and IEF exchange traded funds).
While technology-related stocks have been dominant, be aware that there are risks involved in these areas. Many of these stocks are “extended,” meaning they have come too far, too fast. While most have not begun to correct, it is a possibility. The market’s best performer and currently the second-largest stock, Nvidia, has seen some volatility in the last two weeks. From June 18th through the 25th, NVDA stock had a stretch of trading days that went: +3.5%, -3.5%, -3.2%, -6.7%, +6.8%. That feels a lot more like speculation than it does rational trading.
We are currently keeping a close eye on residential real estate stocks. REITs and Commercial Real Estate has been one of the worst performing S&P 500 sectors in the last few years. Some residential real estate stocks are attempting to turn the corner. We will continue to monitor these stocks for opportunities.
Portfolio Thermostat
Our proprietary portfolio strategy, the Canterbury Portfolio Thermostat continues to hold positions in some of the strongest market areas. We have stock positions in technology stocks like Microsoft, Amazon, and T-Mobile, as well as technology sector exposure via ETFs. At the same time, we own other individual stocks from a variety of market segments, as well as risk management positions that are inverse some of the market’s weakest areas. The goal is to maintain consistent, comfortable portfolio volatility, regardless of the market environment- bull or bear.
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