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Welcome Investors!

Here’s your Alpha portfolio update for July 2024:

• Returns so far this year +7.31%

• Our leading stock is Safe Bulkers Inc currently at +25.4% while our position in Dorian LPG lagged by -17%.

• We have 5 new stock positions and 10 stocks sold.

• Total positions: 14
  _{See the investment portfolio for the rest of our positions.}

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When the year began, analysts were tripping over themselves to predict a market slowdown from 2023's strong pace, with the consensus seeing the S&P 500 gaining only 8% to 9% for all of 2024.

So far, it's a bad prediction – at least at the index level. With the first 6 months of 2024 under its belt, the S&P 500 is up 14%; the NASDAQ is up a little further.

But the analysts are not that far off the mark. For example, the S&P 500 equal-weight index is up a more modest 4.07% for the year. What’s that, and why does it matter?

Bifurcated Market

_{Market bifurcation happens when relative moves between stock groupings that usually trade in semi-tandem, branch into different directions.}

The S&P 500 is a market capitalisation-weighted index. The companies with the largest market capitalisations, or the greatest values, will have the highest weights in the index. For example, as of June 1, 2024, the largest constituent of the S&P 500 index was Microsoft with a weight of 7.2%.

• The Top 3 (Microsoft, Nvidia, and Apple) make up almost 20% of the index.

Apple joined the AI party mid-month with the announcement of an AI integration coming to the next iPhone operating system, lifting the stock 10% and reasserting itself into the cap-weight leadership position.

On the other hand, if you were to take those same 500 constituents and give them each an equal weighting of the index, regardless of how large or small any particular company, you’ve now got an equal-weight index. In this scenario, the big guns of the bunch no longer have an outsized influence over index performance. Hence the return of 4.07% YTD.

And it’s more than just a return. The NASDAQ has seen a max drawdown of -7% for the year. That’s at the index level. But the average stock within that index has seen a max drawdown of -38% for the year. In one recent example, Walgreens (WBA) plunged 22% on Thursday after quarterly results disappointed.

There has been lots of chatter of late regarding the bifurcated market we find ourselves in. Liz Ann Sonders, Chief Investment Strategist for Charles Schwab, recently noted the tale of two markets on CNBC: “Resilience at the index level, but considerable weakness at the individual stock level.”

Why The Resilience?

As Jared Blikre noted in an article on Yahoo Finance, a seesaw theme has become a subtle but important market narrative. On days when AI isn't leading the charge, select pockets of strength keep the S&P 500 from more pronounced sell-offs.

The recent "plunge" in market leader and AI darling Nvidia is instructive. Within 3 days, Nvidia hit an all-time intraday high and corrected – down 16% at one point. If you had caught a minute or two of cable business news, you would have thought Wall Street was doomed.

But a funny thing happened during that scary elevator ride down: The Dow Jones Industrial Average - up only 3% this year – perked up. Energy came alive, biotech jumped, and out-of-favour pockets of the market showed signs of life. The S&P 500 and NASDAQ held their trendlines during that time as other constituents picked up the slack.

In a bull market, when the stocks generating all the headlines falter, other parts of the market can rise to the occasion. Sector rotation keeps volatility low at the index level as new winners offset losers. And the indices grind higher.

Of course, at some point, the music stops and all sectors start selling off in unison, kicking off a new bear market. But we’ll save such talk for another time.

The Next Half of 2024

PIMCO’s Erin Browne: “I’m constructive. We’re in an environment right now where growth [in the economy] is still good, we have inflation coming down - that should be supportive of corporate profit margins. And when we look into the second half of this year, we’re expecting to see an earnings pickup and a gradual broadening out [beyond the AI sector and Tech].”

NB Private Wealth’s Shannon Saccocia: “From a fundamental outlook, we are more optimistic than when we started the year.”

Oppenheimer’s John Stoltzfus: “The bull market appears sustainable.”

Are there risks? Yes, among them geopolitical tensions, overconfidence in the “soft landing” scenario, and the upcoming US presidential election which could introduce uncertainty (that said, historically, election years have been favourable for the stock market).

And now one more…

Ritholtz's Josh Brown: “I’m on record saying the biggest risk to this market is a hiccup in the AI story. The big driving force behind the entire stock market right now – at an index level – is the AI story. And frankly, people need to understand that will work in reverse, as well.”

The market is never a cakewalk.

There will be downturns and corrections along the way – very likely in the second half of 2024. But so far, the underlying economy continues to hold up, the Federal Reserve is marching toward rate reductions, and corporate earnings continue to impress.

Acknowledging that there are always risks, we are guardedly optimistic.

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Ali is the Founder & Editor of The Insider Memo, Follow him on X @ASAInsights