Investment Commentary: Q2 2024

During the second quarter of 2024, equity markets rebounded after a difficult month of April to finish up modestly. However, the divergence between mega-cap technology stocks and the rest of the market became even more pronounced, as these tech-focused equities led by continued enthusiasm over AI continued to drive most of the market results.  

In fact, in the first six months of 2024, U.S. small caps marked their worst performance versus the S&P 500 in history, as the top 10 companies in the S&P 500 now constitute an unprecedented 38% of the index, up from 34% the previous quarter. This concentration within the S&P 500 index can also be seen in the elevated valuations where the current CAPE ratio (a measure like the price-equity ratio that compares stock prices to average earnings) stands at 35.5 as compared to its long-term average of 16.8. Finally, in concert with these concentration and valuation statistics, the potential for increased volatility and draw-down risk are more pronounced as almost half of the S&P 500 index volatility comes from the top 10 stocks.

The market continues to grapple with sporadic inflation, as well as the market’s ability to predict the Federal Reserve pivot to lowering interest rates. The lack of certainty around inflation, as well as the relative strength of the labor markets, has allowed the Federal Reserve to keep interest rates higher for longer. That said, the European Central Bank and Bank of Canada were the first central banks in the G7 to lower their policy targets, each cutting by 25 basis points in June, suggesting to some that that U.S. interest rate cuts are close. In the U.S., despite a relatively low unemployment rate, there has been some significant softening in the labor market, as some leading indicators, such as Non-farm Jobs Openings have fallen to multi-year lows.

The Community Foundation’s Corporate Fund returned 4.2% in the second quarter of 2024, which was again adversely impacted by results in the real assets and private equity allocations. The weakness in the private markets over the last two years due to higher rates, lowering valuations and increasing borrowing costs has created for some endowed institutions a “liquidity pain” — a ratio of unfunded private commitments to the value of liquid assets.  The Foundation continues to monitor its liquidity, exposures and allocations and remains confident in its ability to meet the needs of the community and its customers consistent with the perpetual nature of our stewardship mission.

Questions? Contact A.F. Drew Alden
SVP and Chief Investment Officer, The Community Foundation for Greater New Haven;
President and CEO, TCF Mission Investments Company

*The Corporation is a Connecticut registered investment adviser and part of The Community Foundation for Greater New Haven.
 

Learn more about The Community Foundation's investments.