Stocks: A Historically Strong Seasonal Stretch Ahead
June 2024
Historically, June has been a middle of the road month for the S&P 500 from a return perspective, as the index has generated an average return of 0.7% dating back to 1928. However, during Presidential election years such as this, the S&P 500 has fared far better during June, with an average return of more than 7%. The June through August timeframe has, perhaps surprisingly, been the second strongest consecutive three-month stretch in the calendar with an average return of 3% dating back to 1928, and in election years the S&P 500 return in the June-to-August window has averaged almost five times that figure. With June a historically strong month in election years, and with July’s average monthly return of 1.7% the highest average return of any calendar month since 1928, investors have often not been rewarded for selling in May and going away as the market adage would advise. A profitable summer likely lies ahead.
The S&P 500 could follow the typical election-year pattern and continue to rally this month, but catalysts capable of powering the index materially higher aren't readily apparent. With earnings season in the rearview mirror, the FOMC standing pat on rates for a bit longer, and May's favorable liquidity backdrop turning less supportive this month, a tempering of expectations is likely warranted over the near-term. Communication services and information technology have continued to lead the way as market leadership has narrowed and only around 50% of S&P 500 constituents were trading above their 50-day moving average as of this writing, a less than desirable backdrop and one that leads us to expect a period of chop or consolidation. While upside may be limited in June, the necessary conditions don't appear to be in place to generate a material drawdown in stocks over the balance of the month, in our view, and dips are likely to continue to be bought as investors try to position for a late summer rally.
Positive earnings revisions continued to roll in during May, corporate credit spreads remain tight by historical standards, and the S&P 500 traded within a whisker of an all-time high at the time of this writing. Taken together, this tells us that momentum still resides firmly in the camp of market bulls, and with large cap stocks relative to small- and mid-cap (SMid) indices. We remain constructive on stocks, broadly speaking, and expect tailwinds to build into July/August as a positive seasonal backdrop and improved liquidity boost investor sentiment and risk appetite.
SMid Still Stuck Between A Rock And A Hard Place. Small- and mid-cap (SMid) stocks continued to lag the S&P 500 during May's broad-market rally, and the S&P Small Cap 600 index trailed the 500 by 14% year-to-date as of early June. Small caps have been unable to get off the mat despite falling Treasury yields, a dynamic that should have provided a tailwind for the asset class, as economic growth fears have dominated. Continued tightness in the U.S. labor market, which has forced smaller companies to continue to pay up for labor, remains a near-term headwind and profit margins and earnings growth are expected to be negatively impacted, which has weighed on sentiment surrounding the asset class. This combination has been a headwind for small cap stocks, and we don't foresee this backdrop shifting in a more constructive direction over the near-term as investors will likely continue to favor mega-cap technology stocks riding secular growth themes capable of weathering an economic downturn over smaller economically sensitive issues, at least until rate cuts out of the FOMC appear to be imminent.
Less Restrictive Monetary Policy A Positive For Euro Area Stocks, But Political Risk Is On The Rise, Leaving Us Neutral. As expected, the European Central Bank (ECB) cut key policy rates by 25-basis points in early June but delivered a 'hawkish cut' as policymakers ratcheted inflation expectations higher for both 2025 and 2026 while pushing back on the prospect of additional rate cuts at upcoming meetings. The STOXX Europe 600 index tilts heavily toward cyclical sectors such as financial services, industrials, and materials, and maintains a healthy allocation to interest rate-sensitive sectors such as utilities and telecommunications as well. In isolation, lower short-term interest rates could boost economic activity, corporate profits, and investor sentiment for euro area equities. However, the ECB's ability to cut rates further over the coming months will depend upon how quickly inflationary pressures subside in the euro area and actions - or inaction - out of central banks in the U.S. and Asia. Monetary policy in the euro area is trending in the right direction, but political dysfunction across the currency bloc is on the rise as elections held in early June were destabilizing and heightened political risk/uncertainty put upward pressure on sovereign bond yields. As countries across the euro area prepare for snap elections in the coming months, economic activity could slow to a crawl despite lower interest rates, and a wait-and-see approach to euro area equities may be warranted until the political storm clouds begin to clear.
Election Results Spark Volatility In Emerging Markets. After a promising start to May, emerging market stocks reversed course mid-month as macro forces weakened developing market currencies relative to the U.S. dollar. Thus far, June has brought with it a trend reversal as U.S. Treasury yields have fallen, but political risk has crept in with influential elections in Mexico, India, and South Africa taking place over recent weeks. The common thread between reactions to these elections was a pronounced jump in volatility, regardless of whether there was a surprise or expected outcome. Changes in government can certainly impact the business environment, but markets have historically tended to overreact to election results – both on the upside and downside - as candidates are often more extreme on the campaign trail than they are when they take office. Political uncertainty is often elevated in emerging markets and is another reason why diversification is crucial when allocating to higher-risk/higher-reward asset classes.
