Inflation slows, AI soars: Unpacking Q2’s key market themes

Transcript

welcome to Russell Investments Market week in review for the week ending June 28th 2024 I am your host Lam galuka and I'm joined by my colleague senior director and chief investment strategist Paul idelman Paul thanks for joining how are you yeah I'm doing great how about yourself I'm doing well you know I grew up in Seattle so I'm jealous that you're there but I am here in beautiful Milwaukee uh and excited to connect today thanks for the time sure well you know just to Dive Right In we're almost halfway through the calendar year as we approached the end of Q2 what were some of the major themes and developments impacting markets this week and for the quarter as a whole yeah I'd say uh this week it's been quieter for financial markets both uh Global equities are roughly flat on the week to Thursday and we're seeing stable Sovereign bond yields as well at the margin some of the highest flying Mega cap tech stocks are showing a little bit more two-sided volatility uh into the end of the second quarter instead of their almost vertical or meteoric rise for most of the quarter uh but on the week so far it's been relatively quiet I think for the second quarter in its entirety though I think there's definitely been some bigger themes and bigger Moves In in markets catching attention within Equity markets a lot of it's been driven by this theme around artificial intelligence which has really helped to drive very strong returns in the US Equity Market but particularly the large technology stocks where uh the Magnificent 7 companies are up almost 18% on the second quarter which is a really phenomenal performance uh whereas the other 493 companies in the S&P 500 Index are actually down by a percent on the quarter so a really large Divergence and spread within the equity Market uh largely explained by this uh theme and excitement around artificial intelligence and you see that in some other markets too in the emerging markets for example strong performance there with a lot of it being driven by uh tsmc the semiconductor uh producer in the Emerging Markets on the yield side it's been a a tale of uh two cities if you will where yields Rose very sharply into mid April when a lot of the economic data was strong and we had some upside surprises to inflation in the United States uh and uh a number of the other developed markets early in the quarter uh more recently though yields have been falling pretty sharply uh both on the back of some sluggishness of the growth data and also some downside surprises on the inflation data more recently and so Point too yields are roughly flat on the quarter but it's been a bit of a roller coaster ride as the market narrative has shifted from more of a higher F longer no Landing uh for the global economy to more of a softer harder Landing uh more recently very good and to shift gears quickly I know one thing that's on most investors Minds right now are politics in the elections particularly the outcomes and how they may affect portfolios uh and and the markets generally we're recording this on a Thursday the first US presidential debate is later this evening and we have elections in France and the UK and the week ahead which of these appear to be impacting the markets the most so far we're not seeing uh financial markets price much around the US election yet I think some of that is November is still a ways away and some of it as well is that the election looks to be Incredibly Close right now for both the presidency and Congress and uh it's unlikely until we get closer to Labor Day that we'll have enough information for the markets to start to sniff out which way this is going to break and the implications of that onto financial markets so for now even though this uh debate will be an important watch point on the week uh the US election has not been impacting financial markets that significantly so far I'd say of the three uh we're seeing the the most volatility and impact from France onto Global markets so far where uh Marine Le Pen's party uh a populist party in France is pulling very strongly in uh the data going into a first round of uh National Assembly elections this weekend in France that's caused a sell-off in French stocks relative to their counterparts in Europe and also a bit of a widening out where French Sovereign bond yields have moved up higher relative to uh other government bond yields in Europe like uh the German uh Sovereign bond market for example and so a bit of a risk aversion and anxiety trade there happening in Europe around which way uh these French elections will break uh in this weekend and the second round the week thereafter thanks so much for that insight and one thing I've heard from many trusted colleagues within Russell Investments is don't let your politics affect your planning uh and that's something that we've really embraced here can you expound on that a little bit as some investors may be a little bit fearful of potential outcomes well one of the things we find in our data going back over several decades is investors have a tendency to move into Cash around election years and uh that can actually harm port folio performance if you look at Financial market results over many election Cycles you tend to find that equities do well in election years regardless of uh the outcome of political party one way or the other uh based on what happens in November and I think this theme of staying invested and and trying to be unemotional and dispassionate with investment decisions is really a key to success over the longer term for for our clients perfect thank you for that Paul now to wrap things up one topic that many investors and financial professionals are asking about is where the markets are headed in terms of that dreaded RW right the recession uh I know that Russell Investments recently put together a Q3 Outlook that addresses these concerns can you tell me a little bit more about that yeah so our Global Market Outlook is titled the three scenario problem which goes through uh the key drivers of what is very high uh economic uncertainty right now in terms of the Outlook as a baseline we think it's a little bit more likely than not that the us can avoid uh a recession in the year ahead but there are key areas of uncertainty and risk around particularly uh how high borrowing rates from the Federal Reserve are impacting and and hurting parts of the economy including some households and some businesses that are more prone to those High interest rate conditions that are still leaving some risk absolutely well Paul thank you so much for the time and for the insights uh that has been our Market weekend review thanks for watching and we'll see you next time hi I'm Sophie head of portfolio and business Consulting at Russell Investments if you liked what you just saw and heard consider subscribing to our YouTube channel or check us out on LinkedIn thanks for tuning in

Executive summary:

The Magnificent Seven group of stocks turned in another stellar performance, rising nearly 18% during Q2
French stocks sold off ahead of the country's parliamentary elections
We believe it's more likely than not that the U.S. economy can achieve a soft landing

On the latest edition of Market Week in Review, Senior Director and Chief Investment Strategist for North America, Paul Eitelman, and Regional Director for North America Advisor & Intermediary Solutions, Lam Guluka, discussed key market themes from the second quarter. They also chatted about the potential market impacts of upcoming elections in the U.S. and France, and finished with an overview of Russell Investments’ recently released Q3 Global Market Outlook.

AI enthusiasm powers Q2 market strength

Guluka and Eitelman started off by unpacking the main market drivers from the April-through-June period. Eitelman said that artificial intelligence (AI) was a key theme for equity markets during the quarter, with strong returns from mega cap tech names propelling the U.S. stock market to record highs the past few months. He noted that as of market close on June 27, the Magnificent Seven group of stocks was up nearly 18% on the quarter—a performance Eitelman characterized as phenomenal.

In contrast, the remaining 493 companies in the S&P 500® Index—or the S&P 493—were down a collective 1% on the quarter, he remarked. “This large divergence and spread within the U.S. equity market can really be chalked up to excitement around AI,” Eitelman stated. He added that similar themes played out beyond the U.S., such as in emerging markets, where a strong second-quarter performance was largely powered by gains from semiconductor-producer TSMC.

Turning to bond markets, Eitelman said the second quarter was a bit of a mixed bag, with bond yields rising rapidly during the first few weeks of April on the back of strong economic data and hot inflation readings. Since then, however, yields have fallen sharply amid signs of slower economic growth and a cooldown in inflation, he said.

The end result? Yields were roughly flat on the quarter, Eitelman remarked, pointing to the U.S., where the yield on the benchmark 10-year Treasury note stood at roughly 4.3% at market close on June 27. “That’s very close to where the 10-year stood on April 1—the first trading day of the second quarter,” he remarked, calling the quarter a bit of a rollercoaster ride for fixed income markets.

French stocks sell off as elections loom

Guluka and Eitelman shifted gears to politics, with Guluka noting that elections are approaching in several key developed markets, including the UK, France, and the U.S.

Eitelman said the November U.S. elections haven’t had much of an impact on financial markets so far—partly because the elections are still four months away and also because several of the contests appear incredibly close. “Until the calendar gets closer to Labor Day, I don’t expect markets to have enough information to start sniffing out which way some of these races could break, including the race for the White House and key seats in Congress,” he stated.

By contrast, the upcoming parliamentary elections in France are having much more of an impact on global markets, Eitelman noted. He explained that Marine Le Pen’s National Rally party is polling very strongly heading into the country’s first round of elections on June 30, which has led to a selloff in French stocks relative to their European counterparts. Eitelman added that the spread between French and German government bonds has also widened significantly.

“It’s pretty clear that we’re seeing a bit of a risk aversion and anxiety trade happening in Europe around how the French elections may unfold,” he remarked, noting that the first round of voting will take place on June 30 and the second round on July 7.

At a broader level, Eitelman stressed the importance of remaining calm and disciplined during election season, noting that U.S. equity markets typically do well in election years regardless of the outcome in November. “A look at our data, which goes back several decades, shows that investors have a tendency to move into cash during election years—and this can actually harm portfolio performance. We believe that staying invested and trying to be unemotional with your investment decisions during this time period is vital to achieving success over the long term,” he stated.

Is a soft landing more likely for the U.S. economy?

Guluka and Eitelman wrapped up with an overview of Russell Investments’ recently published Q3 Global Market Outlook, which details the strategist team’s views on global economies and markets in the months ahead. Eitelman explained that the latest edition, published June 25, outlines the three possible outcomes for the U.S. economy—a reacceleration or no landing, a soft landing, or a hard landing (i.e., a recession).

“As a baseline, we think it’s a little more likely than not that the U.S. avoids a recession in the year ahead—but there are some key areas of risk and uncertainty around this viewpoint, including the impacts of high borrowing costs,” Eitelman stated, encouraging readers to download the full report for the complete insights.

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