The Strength of June’s Stock Market Surprised Me and I Think I Know Why

June 24, 2024

By Robert Wiedemer

As per my May 23, 2024 update, I was expecting “modest gains in the market over the summer.”  That’s not what we got in June.  The S&P 500 is up 3.5% month to date.  That’s closer to what I was expecting for the whole summer!

 Excitement around AI?

 Why such a big surge?  The usual suspect is excitement over AI and that’s clearly one reason for the increase with NVIDIA, the benchmark stock for AI, being up 15% in June even after the pullback later in June. 

However, why the excitement around AI?  No big announcements were made.  Yes, Musk is constructing his new computer facility for his GROK AI system in Memphis but that’s not unexpected news and not really a big breakthrough.  NVIDIA’s great earnings announcement was in May, not June. 

More Likely It’s the Lack of Good Alternatives, Such as Commercial Real Estate and Bonds

I think the excitement around AI is only a small part of the upsurge in June.  I think a bigger part is the continuing decline in optimism for commercial real estate and bonds.  Commercial real estate investors were hoping for a big decrease in interest rates by now and so was the bond market.  That hasn’t happened and the Fed meeting in June made it pretty clear there will be no big decrease for at least the rest of this year.

Transaction volumes for commercial real estate and hence, new investments, have plummeted and continue to plummet.  According to CBRE, a major commercial real estate broker, transaction volume fell 57% year over year in Q1 2023 and 40% year over year in Q4 2023.  Inbound cross-border investment decreased 54% in Q1 2024 indicating international investors are also souring on US commercial real estate.

 In Washington DC, traditionally one of the strongest and most stable office markets in the country, the few office buildings that are sold are often selling at 50% to 70% discounts from prices paid five or even 10 years ago. 

 I said long ago that declining interest in commercial real estate and bond investments will eventually help drive up stock prices and there is every chance that this trend is beginning to show up in June.  The attractiveness of the stock market is becoming increasingly clear vs. commercial real estate and bonds.

Looking at the performance of bonds vs stocks over the past five years emphasizes the difference in performance:  In the last five years the S&P 500 is up 85%.  During that same time period the 20 year bond has fallen 28% according to the ETF TLT which tracks the 20 year bond market.  And the fall continues:  Down 8% in the last year and 4.4% year to date.

Professional and Institutional Investors Have to Invest in Something That Makes Good Money – Can’t Put It All in Money Markets Like Some Retail Investors

 It seems clear that stocks are a relatively very attractive investment.  For professional investors and institutional investors like pension funds, they have to invest.  They can’t just put it all in money markets like a retail investor or, quite simply, they will be fired.  They have to put their money somewhere and the stock market has become increasingly attractive relative to commercial real estate and bonds over the past few years. 

 Hope for both bonds and commercial real estate springs eternal from the hope for lower interest rates.  But each year those hopes get dashed makes the hopeful investors less hopeful.  Hence, the declining interest in commercial real estate and bonds will continue to help the stock market, not just in June.

Foreign Stocks and Private Equity Also Not Good Alternatives

 In addition, alternatives to US stocks, such as foreign stocks, don’t look very good with the British FTSE 100 only up 6.6% year to date and the German DAX only up 5.8%.  In fact, many European investors are looking to invest in the US stock market, which is up 15% on the S&P 500 and 19% for the NASDAQ 100 year to date.

Finally, an area that has boomed for institutional investors in the last five years, private equity is now becoming very scary.  That’s because private equity has had a terrible struggle lately selling their investments for anything like what the private equity firms currently value them at. 

 Hence, liquidity for investors has dried up.  They can’t get their money out or can only get it through secondary investors who charge a big discount to buy the private equity shares.  Institutional investors are increasingly reluctant to invest more money in private equity.  The obvious alternative:  Public stocks.  Plenty of liquidity there and great returns. 

Lack of Good Alternative Investments Creates a Virtuous Cycle for Stocks

 The lack of good alternatives to stocks makes for a virtuous cycle.  As more money goes into stocks, the good returns continue. Plus, corporations are helping with continued massive stock buybacks. 

 This virtuous cycle won’t go on forever, but it will likely go on for many years.  As to when and why it might stop, I have written plenty.  But, for now, I feel the June boom is just part of a longer term move away from lower performing alternative investments hit by high interest rates and other factors, to a much better performing US stock market.

 The opportunity is clear.