Part II with Stephanie Link – How She Approaches Investing

Five Things You Should Know

1. Equity Markets – moved lower this week with U.S. stocks (S&P 500) down –1.98% and international stocks (EAFE) falling –2.47%
2. Fixed Income Markets – dropped as well with investment-grade bonds (AGG) down –0.35% and high yield bonds (JNK) down –0.03% 
3. Fed Gains Confidence – In comments this week Fed Chair Powell noted that recent economic data has bolstered confidence that inflation is trending downwards in the right direction towards the Fed’s 2% target, but still emphasized risks associated with the labor market. With a policy meeting set at the end of the month, recent optimism has seen markets expecting the first rate cut as early as September.
4. Global Outage – A bug in software saw computer systems fail across the globe on Friday after a cybersecurity monitor from Crowdstrike caused Microsoft Window’s operating systems to crash. The crash took down many airline services, banking institutions, and the London Stock Exchange among others.
5. Key Insight – [VIDEO] In Part II of our interview with Stephanie Link, Chief Investment Strategist of Hightower, she discusses her role at Hightower and her approach to investing both in general, as well as within her fund. [ARTICLE] In light of this week’s video covering some of Stephanie Link’s process and investment philosophies, we share a recent piece she put out discussing the current environment and market realities in greater detail.

Insights for Investors

While the markets have one eye on the impending election, they continue to focus primarily on the Fed’s likely timeline for a rate cut. On the whole, despite news that has been viewed by market commentators as largely constructive for equity markets, equities have sold off almost 3% to end the week suggesting a deeper underlying concern within markets around valuations and potential pullbacks.

Regarding potential political developments on the future direction of markets, the team at Gavekal summarized the improvement in Trump’s election odds (what they refer to as betting odds repricing) by stating, “In the US, this repricing—should it happen—is likely to be positive for equities. If investors start to expect a Republican clean sweep of both houses of Congress as well as the White House, they will begin to price in a growth-supporting, deficit-expanding and broadly inflationary agenda complete with potential corporate tax cuts and less onerous regulation. This will be positive for prospective corporate earnings. Within the equity market, Trump’s plans to ditch Biden’s green transition and to pivot back to the exploitation of US domestic fossil fuel resources is likely to benefit the oil and gas sector disproportionately.”

Meanwhile, belief in a Fed rate cut continues to grow based both on constructive comments from Powell and other Fed governors that they are pleased with recent inflation data, as well as recent weakening in the labor markets reflected in part by this week’s jump in jobless claims data that saw claims rise by over 20,000 in the last week according to the Department of Labor, reaching their highest level since last August. Such weakness could be used by the Fed to justify a cut to stave off greater economic weakness. Given these developments, you would expect the market to have had a great week but despite headlines like these, equity markets sold off hard Wednesday and Thursday. According to Scott Rubner, a tactical strategist and Goldman Sachs global markets division managing direction, the reasons (as summarized by Bloomberg) include historically weak seasonality as well as a market that is stretched and largely already reflects all the good news. (see more here)

While many will choose to focus on headlines or headline-making stocks, the key for investors is to recognize how many other opportunities exist in already beat-up sectors, stocks, and asset classes with far more favorable risk/reward set-ups. Stephanie covered many of these themes and ideas at the event within the equity market and alluded to them below while describing the current market set-up, drivers, and broader themes for investors to keep in mind.

Enjoy the video above and article below, and of course, reach out to us anytime.

Have a wonderful weekend!

Tim and the team at TEN Capital

What Worked in the Second Quarter
by Stephanie Link, Chief Investment Strategist at Hightower

July 10, 2024

Second Quarter Market Performance

Markets performed well once again in the second quarter with the S&P 500 gaining 4.3% and the Nasdaq gaining 8.5%. The second quarter marked the second lowest S&P 500 gain through the last seven quarters, beating only the Q3 2023 -3.3% return. From the end of Q2 2023 to Q2 2024, the S&P 500 was up 23% and the Nasdaq gained 29.6%. Since the start of 2023 through Q2 2024, the S&P 500 is up 42.6%, with the Nasdaq up a whopping 70.8%. The focus on artificial intelligence and cybersecurity continued to dominate the investment community. As a result, technology was the top performing sector in the quarter, gaining 13.8%, followed by communication services, up 9.4%, and utilities, up 4.7%. The tech and communication sectors are the only two beating the market on a trailing twelve-month basis, up 41.8% and 44.9%, respectively. Treasury yields rose across the curve in the quarter and steepened – meaning long term rates moved higher than short term rates. The 30-year Treasury yield rose 19 bps, the 10-year rose 16 bps and the 2-year rose 9 bps. Year-over-year, the 2-year yield is down 17 bps, while the 10- year yield is up 55 bps. Investors are weighing pending policy rate cuts from the Fed, along with inflation possibly remaining higher and stickier for longer.

Mag 7, Once Again

The driver of market performance in the second quarter was once again mega-cap tech. Nvidia (NVDA), Apple (AAPL), Google (GOOGL) and Microsoft (MSFT) contributed 104% to the benchmark’s total return in the quarter, with NVDA alone accounting for 44% of the index’s return. NVDA gained 36% in the quarter. If that was not enough, out of the 20 top performing stocks in the S&P 500 in the quarter, 80% were in the tech sector. The top 10 names in the S&P 500 maintain a 37.5% weighting, an all-time high, and well above the 1999-2000 weighting of 26.7%. These 10 companies generate 31% of total S&P 500 net income, below the 2020 peak of ~37% and 2000 peak of 46%. YTD, the top 10 names accounted for 77% of S&P 500 returns, coming in second only to 2007. The S&P 500 marketcap-weighted index versus the equal-weighted index tells the entire story: the highly weighed tech focused names have been pushing the index higher this year, outperforming the equal weight index by 13%. Mega-cap tech has been the main beneficiary of the AI trade. These companies also have billions in cash and cash equivalents, making them numb to higher borrowing costs. They are expected to increase capex spending 37% y/y in 2024, to nearly $200 billion, investing in new cloud computing and AI technologies. The expectation of lower interest rates in the near future is also a benefit for further growth. Tech will likely remain favorable for the rest of 2024, but we expect other sectors to catch up owing to solid fundamentals and cheap valuations – industrials, financials, consumer/housing and energy.

No Love for Value

Value indices have struggled on a relative basis to growth. Over the past year, the Russell 1000 Growth index (RLG) is up 40%, with the Russell 1000 Value index (RLV) up only 11%. Comparing the current environment to history, the performance of growth relative to value has never been larger, along with strong divergence across the two indexes relative to the S&P 500. That said, value actually beat growth by 180 bps in the second quarter on a simple average return basis but lagged by 910 bps on a cap-weighted basis, another example of mega-cap tech’s massive pull. Given the heavy influence from technology, growth was the story in the first half of 2024. Interestingly, valuations are not as stretched as they were in the early 2000s. As of June, the average NTM P/E of the largest 50 companies in the S&P 500 is 24.8, relative to 45.3 in March 2000. Companies are also a lot more profitable today than they were in 2000. The second half of 2024 is likely to bring further slowing of inflation, possible Fed rate cuts and one of the most anticipated U.S. presidential elections in history. We have slowed from the 4.9% torrid pace in GDP in Q3 2023 but remain elevated at 2%. We are watching for continued signals of slower growth, especially in the labor market and in the services sector of the economy (which is 70% of consumption). We believe in a 2% GDP world this year, where S&P 500 earnings will grow 8-10%. While we are favorable on technology, we see better value elsewhere – sectors where earnings will support a broader market in the back half of 2024.

Data, Just the Data

U.S. Initial Jobless Claims – rose by 10,000 to 243,000 on the period ending July 13th. This reached a new weekly high, far surpassing market expectations of 230,000. 

U.S. Mortgage Application – soared by 3.9% in the third week of July. This erased the drops from the previous two weeks to mark the sharpest increase in one month. 

U.S. Retail Sales – increased 2.3% YoY in June of 2024. This followed an upwardly revised 2.6% increase in May. 

U.K. CPI – increased to 134.10 points in June from 133.90 points in May of 2024. 

Eurozone Manufacturing PMI – was revised higher to 45.8 in June 2024 from a preliminary estimate of 45.6.