ATHVisions/iStock via Getty Images
The S&P 500 had a strong first half, but rising financial instability and conflicting government and monetary policies may lead to stagnation, high inflation, and an uneven economic impact.
Swing At the Fat Pitches: Heightened Volatility Creates Bargains
Overview
The first half of the year has been nothing short of spectacular for the S&P 500 Index. However, financial conditions are changing due to concerns over slowing global growth, inflation, huge deficits, and geopolitical tensions. The offsetting forces of extreme government deficit spending and tight monetary policy are creating a peculiar economic regime that is contributing to a debt spiral and financial instability, likely leading to stagnating growth and elevated inflation. Bifurcations are being made between the beneficiaries of fiscal excess and the casualties of monetary tightening, allowing the economy to sputter without falling into a recession.
Over the medium to long term, innovation through artificial intelligence (“AI”) is creating a mega catalyst. We believe that AI will be at least as disruptive as the internet was in the 1990s. And, like AI right now, there was incredible enthusiasm around the internet. In the end, the internet over-delivered expectations and drastically changed the world. We believe that AI will eventually do the same.
Massive innovation changes society; not every company involved will survive or thrive. The internet broke down borders, increased competition, and improved the quality of life for billions of people worldwide. Companies that failed to innovate are no longer with us. Netflix (NFLX) replaced Blockbuster, and Amazon (AMZN) replaced Sears. There are countless other examples. Expect the same to happen once again.
However, over the near term, corporations are spending billions of dollars on AI, and slowing earnings growth is forcing tough questions on how and when there will be a return on this investment. During tough times, valuations and spending become a focus point, and that is what is happening now.
Stay diversified, stay invested, and swing at the fat pitches because periods of heightened volatility create bargains for the astute investor.
Stocks
Slowing growth is forcing a re-think on companies with questionable valuations (Magnificent 7) and those that haven’t participated in this great bull run (small-cap and value-oriented equities). This led to a rotation where small-cap value stocks (Russell 2000 Value Index) outperformed the Mag 7 stocks by 13% in July.
Nvidia (NVDA) was breaking the laws of financial gravity and is finally showing weakness. Nvidia is now down over 20% from its all-time high in mid-July. However, context is always key. Nvidia is still up well over 100% year-to-date and boasts a market capitalization of $2.7 trillion. If Nvidia’s market cap continues to expand at its rate this year, it will be larger than the market cap of the entire S&P 500 Index in less than three years. Do we think that will happen? Absolutely not. It is way too early to crown any winners. The success of Nvidia and others will attract competition. That competition will create future rounds of winners and losers. Yahoo once had a market cap greater than Apple, Google, or Amazon!
Bonds
We’re in the midst of an epic battle between monetary and fiscal policies. Monetary policy is fighting inflation, primarily through higher interest rates, which force the economy to deleverage. Simultaneously, deficit spending during an economic expansion is adding fuel to the economy.
The market expects the Fed to begin cutting interest rates at its September meeting and reduce them by 0.75% in total by 2024.
Interest rates across the treasury curve fell while credit spreads, or the premium paid to assume default risk, widened modestly in July as investors favored the safety of U.S. government debt due to increased economic uncertainty.
Investors in fixed income are advised to proceed with caution. Now is not the time to make big credit or duration bets. The timing of the next recession, the future path of inflation, and many other economic and political risks that may impact both interest rates and credit spreads create a murky path forward, at best.
Commodities
July was not a good month for most commodities as prices fell based on concerns about global demand. Central to global growth concerns is China, which is the largest importer of crude oil and many other commodities. Beijing recently supported its economy through interest rate cuts. Energy, industrial metals, and agricultural commodities were down 8%, 7%, and 5%, respectively.
Alternatively, gold prices advanced 4% during the month as the same bearish factors that created headwinds for other assets caused tailwinds for gold. In our view, gold is the ultimate store-of-value asset and an essential component of any diversified asset allocation.
Digital Assets
The big news in digital assets during the month was the launch of the physically backed ether ETPs. These ETPs raised $800 million in the first two days of trading, following the launch of the spot bitcoin ETPs in January.
Bitcoin (BTC-USD) is now around 15 years old and, like any teenager, is fighting for its place in the world. Bitcoin and other digital assets are maturing, and investors are noticing. The launch of physically backed digital asset ETPs further institutionalizes these assets and dramatically increases the ease of ownership for investors.
New asset classes are not created frequently. If you are still staying on the sidelines, stop. Failure to allocate to bitcoin has only harmed your performance. Every investor should consider allocating 1-3% of their portfolio to bitcoin.
Disclosures
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
The Russell 2000® Value Index measures the performance of the small-cap value segment of the US equity universe. It includes those Russell. 2000 companies with relatively lower price-to-book ratios, lower I/B/E/S. forecast medium term (2 year) growth and lower sales per share historical.
The S&P 500® Index consists of 500 widely held common stocks covering industrial, utility, financial and transportation sector; as an Index, it is unmanaged and is not a security in which investments can be made.
The S&P 500 Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Van Eck Associates Corporation. Copyright © 2024 S&P Dow Jones Indices LLC, a division of S&P Global, Inc., and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit S&P Dow Jones Indices S&P® is a registered trademark of S&P Global and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.
There are inherent risks with equity investing. These risks include, but are not limited to stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices.
There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. This risk is heightened with investments in longer duration fixed-income securities and during periods when prevailing interest rates are low or negative.
Investments in commodities can be very volatile and direct investment in these markets can be very risky, especially for inexperienced investors.
Digital asset investments are subject to significant risk and may not be suitable for all investors. Digital asset prices are highly volatile, and the value of digital assets, can rise or fall dramatically and quickly. If their value goes down, there’s no guarantee that it will rise again. As a result, there is a significant risk of loss of your entire principal investment.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.
© 2024 VanEck. VanEck®, VanEck Access the opportunities®, and the stylized VanEck design® are trademarks of Van Eck Associates Corporation.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
