Insights into key market performance and economic trends from Dan Kemp, Morningstar’s global chief research and investment officer.
The first half of 2024 closed with the news that inflation has continued to fall in line with expectations, as the core PCE measure of inflation fell from 2.8% to 2.6% over the last 12 months. While this news would be expected to encourage bondholders, prices fell on Friday as the yield on the 10-year Treasury rose to 4.4%. This again reminds us that the link between economic data and short-term price movements is not predictable.
Small-Cap Stocks Struggle, Stay Undervalued
The Morningstar US Market index finished the week flat, having risen 14.07% over the first half of the year. Although smaller companies stock prices rose over the week, the sharp bifurcation in US equities remains, with the Morningstar US Small Companies index up 1.85% in 2024 so far and remains deep in undervalued territory according to Morningstar’s equity analysts. This demonstrates that while valuation can be a good guide to the relative long term returns of equities, it is typically a poor guide to timing investments and tends to confound those who use it for this purpose.
Earnings Season Approaches
As we approach a new earnings season, two key points are noticeable. First that earnings expectations are high but falling with year-on-year profit growth expected to be 8.8% for Q2 compared to 9% three months ago, according to FactSet Earnings Insight. Second that companies that disappoint investors are being treated harshly, as evidenced by Nike, which fell 20% on Friday having posted results below expectations. You can read what Morningstar’s Nike Analyst David Swarz thought of the results here. A combination of high expectations and weaker results is fertile ground for volatile prices and so it may be important to remember that successful investing is dependent upon remaining invested when others are reacting to news.
European Elections Loom
Equity markets outside the US have made good progress this year but have continued to trail in the wake of larger US companies, evidenced by the Morningstar Developed Markets ex US index which is up 4.76% over the first half. Investors in French stocks have had an especially torrid time following the announcement of a snap parliamentary election with Morningstar France index falling 7.69% over the last month. Geopolitics and specifically the economic impact of elections are likely to dominate the minds of commentators this week with results from both the French and the UK elections. The risks for investors of these events along with broader geopolitical trends were highlighted by Ian Bremmer (founder and president of the Eurasia Group) at the Morningstar Investment Conference in Chicago last week. You can read more about the views Ian expressed here.
US Employment Back in the Spotlight
As we enter a shortened trading week, the big economic news is likely to be the US employment report on Friday. Economists are expecting the unemployment rate to remain steady at 4% and earnings growth to fall, according to MarketWatch. In a week when many market participants will be away from their desks on July 4, an outcome that varies significantly from those expectation could lead to volatility but is unlikely to require a change in strategy.