Current market environment performance of dynamic, risk-managed investment solutions.
By Tim Hanna
Elevated inflation caused stocks to decline during the first half of April. However, in May and June, following strong first-quarter earnings and improving inflation data, global equity markets resumed the upward trend they started in the third quarter of 2023.
Much of the second quarter’s gains came from the renewed “artificial intelligence” rally, with mega-cap tech stocks dominating. Nvidia (NVDA) alone contributed 1.60% of the market’s return. However, the rally did not broaden to other sectors. This is most clearly seen within the size factor, as evidenced by small-cap stocks losing over 3% in the second quarter.
From a technical perspective, the market experienced a pullback in April. But once prices broke out of the short-term downtrend, momentum significantly contributed to the continuation of the longer-term trend, with markets setting new highs through the second quarter.
Fundamentally, there were no major surprises in the economic data during the quarter. Momentum shifted upward in the second half of April following a strong jobs report and improving inflation. Key factors driving price action included continued enthusiasm about artificial intelligence, improving inflation, and the Federal Reserve holding interest rates steady, with markets now anticipating a rate cut in September.
Large-cap stocks outperformed small-cap stocks during the quarter, and growth investment styles outpaced value investment styles. Dividend stocks lagged behind the broader market.
Foreign markets were mostly positive in the second quarter. The European Central Bank cut interest rates, but persistent inflation led other major central banks to hold rates steady. Global ex-U.S. markets underperformed emerging markets in the second quarter. Eurozone stocks declined amid uncertainty around France’s parliamentary elections and declining expectations for steep rate cuts. U.K. equities advanced, with the FTSE 100 setting new all-time highs. Japanese equity markets rose during the quarter. However, due to the continued depreciation of the Japanese yen, foreign-currency-based returns were negative. The strength of the U.S. dollar, supported by a stronger U.S. economy, was the primary driver of the yen’s weakness. Taiwan, India, and Singapore were the best performers in the MSCI Asia ex-Japan Index. In contrast, Latin America lagged significantly, with the Latin America 40 Index down over 10%.
Four out of 11 sectors posted gains for the quarter, with three sectors beating the S&P 500. Technology, Communication Services, and Utilities led performance in the U.S., while Materials, Industrials, and Energy were the worst performers.
The bond market recovered some ground in the second quarter, with yields on the 10-year Treasury falling over 30 basis points from their April peak, ending the quarter at 4.37%. Improving inflation and a more confident outlook for upcoming interest-rate cuts contributed to the bond market’s performance. The Bloomberg Barclays U.S. Aggregate Bond Index, a bellwether for bonds, reported positive returns. Longer-duration bonds underperformed their shorter-duration counterparts. High-yield bonds saw positive returns, while investment-grade bonds tracked closer to aggregate bonds. Internationally, political risk caused idiosyncratic weakness in certain global markets, such as that seen in France due to the announcement of snap parliamentary elections.
Gold rose in the second quarter, hitting new all-time highs in April and May. Following the rally that started in early April, gold’s price action was fairly sideways, ending the quarter around the middle of the channel formed during the period. Gold’s price gains were influenced by many factors, including continued buying from central banks; demand from retail investors in China; and improved sentiment in the U.S., which helped reduce outflows from the metal.
The second quarter highlighted the persistence of momentum during trending periods, even as markets attempted to change course in April. Equity markets, after experiencing a healthy pullback in April, continued their uptrend through May and June, setting new all-time highs. Improving inflation and confidence in upcoming interest-rate cuts helped bond market performance during the quarter. Gold set new all-time highs, but price action was muted in the second half of the quarter compared to what investors experienced during the March and April rallies. Second-quarter performance domestically and across the globe provided insight into how investor expectations dynamically adjust as new data enters the market, which itself is a forward-pricing mechanism.
Performance trends for the quarter
Equity markets experienced turbulence early in the second quarter before continuing their longer-term uptrend. During the quarter, Flexible Plan Investments saw pockets of success with its systematic, dynamic, risk-managed approach to investment management. About 40% of our strategies were profitable for the quarter. The majority of those that weren’t profitable were down less than 1% across risk profiles. Top-performing strategies tended to be aggressive equity strategies that capitalized on the resumed upward movements in equities during May and June.
Strategies that struggled during the quarter were primarily tactical bond strategies and pattern- and seasonality-based equity strategies. These strategies can struggle when market pullbacks are short and shallow. Algorithms recognize risk entering the markets and respond accordingly. Most models favored a more risk-on positioning once prices reestablished their uptrend in May and June, but they experienced whipsaws during the April pullback.
Among our risk-profiled strategies, there was a positive correlation between risk and return. More aggressive strategies gained more for the quarter, taking advantage of market movements once upward price action resumed after April’s sell-off.