as of June 30, 2024
Global equity markets had a solid second quarter although dispersion within equities was large. Expectations for rate cuts were pushed out. However, markets were upbeat amid improving inflation readings, the AI narrative, strong corporate profit growth and a generally solid economy, which benefited US large growth stocks the most. Returns for small cap and value were negative. International equities suffered partly due to heightened political uncertainty in Europe, while emerging markets performed strongly.
US economic growth continued to remain strong over the second quarter. Growth was weaker in developed countries outside the US as well as China, which still seems to be touching bottom. Overall, this paints a picture of a resilient global economy and aligns with our expectations of a moderate slowdown in global growth in 2024 and 2025 while avoiding a hard landing. US inflation was below expectations in the second quarter of 2024 and is expected to decline further as remaining inflationary components such as shelter roll over. Labor markets have shown signs of softening from tight levels as seen by the unemployment rate increasing slightly to around 4.1%, which may help inflation fall back to target.
Global equities maintained their momentum for the with the MSCI ACWI, a measure of global stocks, returning 2.9%, but there was considerable dispersion this quarter. The S&P 500 rallied strongly during the quarter, up 4.3%, still led by the Magnificent 7. International developed stocks returned -0.4% in Q2, far behind US equities due to their lower tech exposure, slower earnings growth and additional political uncertainty. Emerging markets equities returned 5.0% in Q2, outperforming developed equities, which was driven by strong positive returns from Asia.
Within fixed income (bonds), the Bloomberg US Aggregate Index returned 0.1% during the quarter. Treasuries returned 0.1% and corporates were flat. The yield curve shifted higher during the quarter. US high yield bonds returned 1.1% during the quarter, as high yield spreads fell 24 basis points to 3.1% in a risk-on market.
Global developed REITs returned -2.1% during Q2, underperforming broader equity markets by a wide margin. Core infrastructure stocks had moderately positive returns during the quarter. Higher rate sensitivities for both sectors were a headwind this quarter. Commodities and natural resources had negative to positive performance depending on the index.
The Federal Reserve has remained cautious as implied by their dot plot. Outside the US, the European central bank cut rates for the first time since 2019 and the Swiss national bank cut rates for the second time in a surprise move, while the Bank of England held rates steady but is also expected to start cutting rates later this year. Japan on the other hand exited yield curve control as inflationary pressures mounted, albeit from very low levels.
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