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Kuby’s Commentary

Nasdaq Fireworks

Jul 8, 2024

Last Week

Meet the new boss. Same as the old boss. The S&P 500 kicked off the second half of 2024 with its best weekly performance in 8 weeks. Once again, however, the rally was driven by the same boss, Mr. Big Tech (not Bruce Springsteen). The S&P jumped 1.9%, fueled by a 3.5% surge by the Nasdaq. But don’t get fooled again! There were as many declining as advancing issues, and the Equal Weight S&P 500 Index was down 0.4%. The Mid-cap and small-cap indexes also lost over 1%. This historic period of performance dispersion continues to drive the valuation gap between large growth stocks and pretty much everything else to historic levels. For example, the IVW (iShares S&P 500 Growth) trades at an average P/E of 34.8, 5.5x sales, and 8.9x book value, with a dividend yield of 0.7%. At the other end of the valuation spectrum, the IJS (iShares S&P 600 Small Cap Value) trades at an average P/E of 13.5, 0.6x sales, 1.2x book value, with a 2.8% dividend yield. Momentum rules the moment, but valuation has proven to be the true boss in the long run.

Enthusiasm over Artificial Intelligence has propelled the momentum stocks, while concerns over high interest rates have been weighing down many other sectors. The recent economic data makes a compelling case for the Federal Reserve to commence interest rate cuts in the very near future. Not only has the inflation data been tame, but the labor market is showing obvious signs of weakening. Nonfarm payroll employment for April and May were both revised down sharply, while the June jobs report showed an increase in the unemployment rate with slowing wage growth. The yield on the 10-year Treasury slipped seven basis points to 4.27%, and the 2-year rate dropped to 4.6%. The dollar weakened, leading to a rise in gold and crude oil prices.

There are still no Chicago sports teams with winning records, although we take note that our soccer franchise, the Red Stars, is at least in the middle of the pack. The Bulls’ roster overhaul continued over the weekend, marked by a three-team trade of DeMar DeRozan to the Sacramento Kings.

This Week

The big news will come on Thursday with the release of the eagerly anticipated consumer price index (CPI) report. The consensus calls for a 0.1% monthly increase following May’s unchanged reading. If the downward trend continues over the next few months, then the CPI could be comfortably below 3% by the end of the summer. So far, the thorn in the side of inflation doves has been shelter costs, which will likely be a strong area of focus among market commentators on Thursday. The Fed’s contractionary policy has certainly had its intended impact on many of the CPI’s more “sticky” non-shelter components (see graph below). Still, shelter costs have remained more stubborn than other components. Therefore, we think any weakness in the shelter component would drive a bond market rally and an overall more “risk-on” equity markets tone.

Earnings season will also commence, with the big banks reporting results later in the week. The consensus calls for S&P 500 earnings to rise 8.8% for the quarter.

Lower interest rates and higher corporate earnings are a sunny environment for financial assets, including value-priced small caps.

The stocks mentioned above may be holdings in our mutual funds. For more information, please visit www.nsinvestfunds.com.

The information provided in this commentary is not an offer to sell or the solicitation of an offer to purchase any security, product, or brokerage service. The information is not intended to be used as the basis for investment decisions, nor should the information be construed as advice designed to meet the particular needs of any investor. This commentary is presented to illustrate examples of the securities that North Star Investment Management Corporation and/or its affiliates (“North Star”) may have bought for client accounts and the diversity of markets in which North Star Investments may invest, and may not be representative of current or future investments. You should not assume that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this commentary will be profitable or will be equal to any corresponding performance levels that might be indicated. Past performance is no guarantee of future results. Investments in securities involve risks including the possible loss of the principal invested. North Star and others associated with it, including employees, may have positions in and effect transactions in securities of companies mentioned or indirectly referenced in this commentary. North Star may buy, sell or hold these securities in proprietary or client accounts. North Star will not be providing regular updates or advising you of any changes in the views expressed herein. Investors should consider their investment objectives, risk tolerance, and financial situation and needs before investing in any security. Tax considerations, commissions, fees and other costs should be carefully evaluated with one’s investment and/or tax advisors. Information provided is obtained from sources deemed to be reliable, but North Star cannot guarantee the accuracy or completeness of the information. This material may not be reproduced, distributed or transmitted to any other person in whole or in part without the prior written consent of North Star. A copy of North Star Investment Management Corporation’s Form ADV Brochure, Privacy Notice and Business Continuity Plan summary can be obtained by calling 312-580-0900.

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