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Commentary & Insights

Commentary

Market Commentary – July 2024

09 July 2024
Willie Howard Mays Jr photo

“They throw the ball, I hit it. They hit the ball, I catch it.” 

 ­—Willie Howard Mays Jr.; 1931-2024.

Let me preface—any baseball-related comments reflect the opinion of the anonymous author, not the entire WCF Team. 

As a lifetime “bleed blue” Dodger fan, it is painful to tip my hat to a San Francisco Giant.  However,  Willie Mays’ sheer greatness preempts fandom.  Vin Scully,  the Los Angeles Dodgers’ announcer for 67 years, admitted that Mays was his favorite player.  We applaud the simplicity of the quote above.  Execute fundamentals to win.

That clarity stands in deep contrast with the complex dynamics enveloping the financial markets.  In this note, we want to address return drivers, signals, and a game plan.

What Drives Market Returns

Baseball encompasses five basic skill sets including hitting, hitting for power, fielding, pitching, and running.  Players, especially starting early, can drill to hone these quantifiable skills.  Casual baseball fans can identify power, speed, and defense.

Some baseball players experience successful careers with only a single skill.  The “ideal” player, admittedly rare, would possess all five.  Many consider Willie Mays the GOAT (greatest of all time) because he excelled at every aspect.  How about ideal stock market fundamentals?  The traits would include cheap valuation, low interest rates, and robust economic growth.  How does today’s market fit?

  • The S&P 500 trades at 20.89 times the $261 of expected earnings in the next twelve months. (1) Compared to the 15-year average of 16.1—not cheap.
  • The 10-Year Treasury yield ends the quarter at 4.32%, below the April peak of 4.69% but significantly higher than 3.88% at the beginning of the year. (2) Anticipation of six interest rate cuts have been confronted with the possibility of none.
  • As depicted in the graph below, the economy, though still growing, has experienced consecutive quarters of deceleration. (3)

Real GDP graph

Lackluster fundamentals explain the tepid equity returns so far this year.  Consider the performance of the three major equity baskets we use to classify stocks. (4)

  • The average large cap U.S. stock is up 4.96%.
  • The Russell 2000 Index of small cap stocks is up 1.62%.
  • The EAFE Index of International stocks is up 5.79%.

stock market graph

A portfolio consisting of only stocks with 50% in the average large cap stock and 25% each in small and foreign stocks, should have produced a return of 4.3%.  The curve ball comes from the S&P 500 Index—up more than 15%. 

How?  The S&P 500 puts more weight on the bigger stocks.  In 2023, The Magnificent Seven carried the “index” disproportionately ahead of the “average” stock.  In 2024, this dynamic has been more extreme, especially with former darling Tesla down by more than 20% as of the quarter-end.  

Instead, a staggering 32% of the index return derives from a single stock—NVIDIA. (5)  

Baseball stadiums frequently blare the music associated with an individual player when they are either pitching or batting.  If NVIDIA had a song for the stock market it might be, “I’ve got the whole world in my hands…”

Like baseball, fundamentals only tell part of the story.  General managers of baseball teams lean into advanced data analytics such as fielder’s positioning, pitching patterns, and bat angles to mine for every possible advantage.  Stock market “technicians” also tend to follow esoteric internal data points.

  • A “narrow” market represents a weaker base.  Returns this year can be attributed to a handful of stocks perceived to be winners in the coming A.I. revolution.  NVIDIA, Microsoft, and Apple now constitute approximately 20% of the S&P 500, the highest figure ever for just three stocks. (6)
  • Market historians at Leuthold Group recently noted that the S&P 500 closed at a new all-time high in mid-June, yet the number of stocks at new 52-week lows exceeded new 52-week highs.  In this century that has only happened twice—September 20, 2018 and December 10, 2021.  Both signaled market tops. (7)
  • Yet, market momentum remains strong.  That is fancy talk for “what goes up tends to keep going up.”  Leuthold notes, “technical merits are the sole offset to the mostly negative fundamental evidence.” (8) This is equivalent to a baseball team with poor fielding and no hitting, winning with only great pitching.  It is working, but is it sustainable?

Signals

Uninspiring fundamentals and concerning technical indicators do not elicit much optimism.  Yet, equity markets remain modestly positive for the year, even ignoring the NVIDIA surge.  What do investors see in the coming innings that provides hope for the game to end on a good note?

Baseball uses signals to communicate.  The catcher shows a certain number of fingers to the pitcher indicating which pitch to throw.  Field coaches signal runners about stealing bases.  The financial markets create their own steady stream of signals. 

Some signs resemble scoreboards, denoting past activity, such as the chart above showing a deceleration in economic growth.  Other signals, however, point prospectively.

  • The Conference Board produces the Index of Leading Economic Indicators “that has dropped for the past two consecutive months.” (9)
  • Coincidental to the slowing economy, inflationary pressures are easing.  The Commerce Department just released a report indicating that consumer prices in May had “the mildest such performance in more than four years.” (10)

Prices have risen 2.6% in the past 12 months (June 2023 - May 2024).

  • The TIPS-implied rate of inflation for the next 10 years is a manageable 2.28%. (11)
  • Non-farm payroll employment expanded in the latest report by 272,000. (12)
  • Earnings on the S&P 500 are projected to grow by more than 10% in each of the next two    years. (13)

Collectively, one might summarize these data points with the following narrative:  The economy continues to grow, albeit at a slower pace.  Inflationary pressures are easing, providing the Federal Reserve Board with cover to lower interest rates later in the year.  The proverbial “soft landing,” (breaking hard enough to tame inflation, but not hard enough to cause a recession), seems achievable.  Should the projected earnings growth materialize while this economic scenario plays out, today’s valuations make sense. 

Uncontrollable Factors 

Strategizing baseball victories typically entails a fundamental analysis of your team’s strengths and weaknesses compared to the opponents’.  Umpire calls, weather, and injuries are beyond the manager’s control. 

Unlike baseball results, driven primarily by the five skill sets, financial markets represent nothing but the manifestation of exogenous influences.  What is the direction of both fiscal and monetary policy?  Will technological progress render a product or service obsolete? What happens if there is a global pandemic?  How do elections impact markets?

Every four years we roll out the graphs that support the exceedingly similar stock market performance in both Democrat and Republican presidential cycles.  

The chart below shows the tendency toward positive stock market performance in election years. (14)

S&P 500 graph

We will only mention that both candidates favor stronger tariffs on imports and, despite the rhetoric to the contrary, such restrictions to free trade heighten inflationary pressures.  Also, expect significant fluidity on tax issues related to the structural sunsetting of rules enacted in 2017.

Game Plan

We focus on fundamentals and have learned to “live with technicals.”  Toni Sacconaghi, a highly respected market analyst, published a report showing that, “stocks trading at price-to-sales multiples above 15 times tend to be terrible investments.  From 1970 to 2020, those stocks underperformed the market by 28 points over five years.” (13)  The single biggest discrepancy between the average stock and the S&P 500 Index, as established earlier, is NVIDIA, a stock that happens to trade at 38 times sales.  Our insistence on maintaining price discipline has kept us from chasing that ball as it leaves the park.  We accept that as the price paid for discipline.

Regulation time for each baseball game lasts nine innings.  Each season consists of 162 games.  Every decision should balance today’s need to win with tomorrow’s.  Investing could not be more different.  Your investment horizon depends on your age, your unique liquidity needs, and tolerance for uncertainty.  Successful long-term strategies lean into the fundamentals of diversification, patience, and discipline.  

Our goal never wavers…we want to keep you in the game.

 


  1. EPS forecast from Yardeni.com.
  2. YCharts.com.
  3. Gross Domestic Product; Bureau of Economic Development; June 27, 2024.
  4. YCharts.com.
  5. “There’s No Magnificent Seven.” Allan Sloan; Barron’s; June 14, 2024.
  6. “Just 3 Stocks Rule the Market. Why You Should Be Worried.” Barron’s; June 7, 2024.
  7. “S&P At a Pretty Lonely High.” Leuthold Group; June 12, 2024.
  8. “MTI: Economy & Market Internals Weaken in Tandem.” Leuthold; June 24, 2024.
  9. “The Conference Board Leading Economic Index (LEI) for the U.S. Fell Again in May.” PRNewswire.com; June 21, 2024.
  10. “Federal Reserve’s preferred inflation gauge shows price pressures easing further.” AP News; June 28, 2024.
  11. FRED, Federal Reserve Bank of St. Louis; June 28, 2024.
  12. “Economic News Release;” Bureau of Labor Statistics; June 7, 2024.
  13. Earnings Insight; FactSet; June 21, 2024.
  14. Strategas presentation; June 2024.