Markets In A Nutshell — For June 2024

The narrow US-market rally advanced in June, propelled to nosebleed highs by Wall Street’s relentless optimism. The S&P 500 Index closed the first half of the year more than 14% up. The air is becoming even thinner at the top: almost 60% of the gain was driven by just five stocks — Nvidia, Microsoft, Amazon, Meta and Apple. Nvidia alone accounted for almost a third of the market’s first-half advance. 

In the second quarter, these Fantastic Five were whittled down to the Thrilling Three — Nvidia, Apple and Microsoft. Together, they accounted for more than 90% of the 4% index return, of which 3.5% was achieved in June alone. 

Meanwhile, speculative euphoria has ignited a fresh bout of meme-stock mania. Goldman Sachs’s Risk Appetite Indicator — a broad-based measure of investor enthusiasm — is near its highest levels. However, the US economy is evidently cooling. Reports on personal spending, jobless claims, housing supply and home sales raise questions about whether the slowdown might yet accelerate.  

The dramatic performance by a handful of mega-cap stocks masked far weaker performance among the index’s other constituents — the returns for the equal-weighted version of the S&P 500 were negative for the second quarter. This outcome is evident in other world equity markets: those in the UK, Eurozone and China were down 2–3% in June when measured in US dollars, which gained against the other currency majors.

In South Africa, a relief rally drove ‘SA Inc.’ assets dramatically higher after a volatile month concluded with the announcement of a clunky Government of National Unity. President Ramaphosa’s bloated cabinet comprises 11 parties, 32 ministers and 43 deputy ministers. The rand, bonds and domestically focused shares, such listed as property stocks and financial shares, all surged. Rand hedge shares and resources lagged on rand strength and lower commodity prices — excluding oil, which gained.

The market environment was again negative for the conservative Foord International Fund, given its low weighting to US tech stocks and broader diversification across other markets which were negative in the month. Shares in the materials sector were detractors. The Foord Global Equity Fund also ended lower and underperformed its US-heavy MSCI All Country World Index benchmark for similar reasons.

The negative returns from the Foord global funds weighed on returns of the Foord SA multi-asset funds — made worse by rand strength in June. The SA portfolios were positioned to hedge the very worst election outcomes, which were only very narrowly avoided. Nevertheless, the managers were able to adjust portfolios timely as the GNU became more likely, such that drawdowns were contained. The SA-only Foord Equity Fund advanced 3.8% in the month, while the Foord Bond Fund leaped 4.9% as SA bonds rallied.

With US equity valuations at the top end still reflecting best-case scenarios — and risk premiums for corporate bonds the narrowest they’ve been in three years — the margin for error is wafer slim. Peak bullishness in a market lacking breadth risks collision with a US economy that is visibly slowing. 

Risk of permanent capital loss in the frothiest sectors of markets is now much higher than normal. Instead of taking inordinate risk investing in a very small group of overpriced stocks, we prefer instead to hold a far wider portfolio of high-quality investments across many different asset classes, sectors and geographies. We are confident that — in time — this approach will deliver to our investors the returns they require, without exposing them along the way to the devastating risks of capital destruction.