Last year, a knock on the market was its lack of breadth, whereby a small number of names were responsible for driving the majority of returns. Of course, we know that those stocks were the Magnificent Seven stocks, which contributed 57% of the S&P 500’s 26% return. Upon reflection, this narrative wasn’t too off base as the concentration was driven by investors favoring companies that offered high quality growth potential coupled with strong profit margins. We detailed this phenomenon in a blog post published in early December 2023.
Through the end of May 2024, the Magnificent Seven stocks have contributed 50% of returns. Four Magnificent Seven stocks comprise the top four spots with Eli Lilly slotting in fifth. Financials like Berkshire Hathaway and JPMorgan can be found in the top 10 as well. So, there’s been some broadening, but investors have favored companies exposed to themes like Generative AI and GLP-1. This strength comes when markets have ratched down their expectations of rate cuts from the Fed which was a recent narrative used by the bulls.
Top 10 S&P 500 Contributors
Source: Bloomberg, as of May 31, 2024. For illustrative purposes, the holdings of the S&P 500 are represented by the iShares Core S&P 500 ETF (IVV).
Positive performance has coincided with subdued volatility. In fact, volatility is so low that it’s approaching levels last seen in pre-Volmaggedon 2017. The VIX closed May at 12.92, only slightly above the 2017 average of 11.09. That year, the VIX was low due to several contributing factors. The global economy experienced steady growth, which reduced uncertainty and instilled confidence in markets. In addition, central banks maintained low interest rates, supporting market stability and encouraging investment. Strong corporate earnings reports further boosted investor sentiment, while relative political stability and the absence of major geopolitical events contributed to an extremely low volatility environment.
Of course, the 2024 backdrop is far from that of 2017. The VIX is low this year due to several factors that have created a stable market environment. With the realized volatility for the S&P 500 being exceptionally low, it has limited the demand for downside hedges, as market participants feel less need to protect against large drops in stock prices. Additionally, the Fed's data-dependent stance and the anticipation of eventual interest rate cuts have reduced market uncertainty. Furthermore, increased corporate share buybacks and a weaker US dollar have contributed to the overall reduction in market volatility.
Stock Market Volatility Approaching 2017 Levels
Source: Bloomberg, May 31, 1994 through May 31, 2024.
The US Misery Index was a concept first introduced by economist Arthur Okun in the 1970s. It gained prominence during the economic struggles of that decade, particularly during periods of stagflation when both inflation and unemployment were high. The US Misery Index, calculated as the sum of the unemployment and inflation rates, measures economic discomfort. It's a good barometer because it reflects the real-world impact of economic conditions, highlighting periods of economic stress and potential hardship for the average citizen. As of the most recent data, the Misery Index has fallen from its July 2022 high of 12.70% to 7.30% today.1 The declines have been driven entirely by inflation decreasing from over 9% to 3.40% today. So, while inflation may not be at levels most would prefer, price increases have slowed down and unemployment has remained relatively steady. The jump in Consumer Confidence Expectations from 66.4 to 74.6 is an indication that sentiment may be improving as well.2
US Misery Index has Declined
Source: Bloomberg, May 31, 1994 through April 30, 2024.
All of the above points to markets remaining supported as we enter the summer months. Now that earnings season is behind us, markets will likely be driven by developments in inflation and employment. And, whether we want to admit it or not, the US economy has been incredibly resilient as certain emerging markets have started to build momentum. While the consumer, especially on the lower end does appear to be facing the brunt of price increases, we don’t anticipate a material change in the economic environment occurring either positively or negatively in the near term. In other words, until something changes or there’s an exogenous shock, investors will likely stick to what’s working. To us, this means that the Generative AI and GLP-1 themes will likely continue to be the favored areas of investors.
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