The third week of June 2024 brought a mix of market movements, with tech stocks faltering in the US while Europe grappled with signs of economic slowdown. Despite these headwinds, European markets proved resilient along with global small caps while the UK and Japan emerged as top performers.

The biggest story of the week was the sharp 12% drop in NVIDIA's stock price, which sent ripples through the tech sector and dragged down the NASDAQ. This pullback appears to be a case of profit-taking after a period of overheating, highlighting the volatility that has become a hallmark of the tech space.

In Europe, economic data painted a less rosy picture, with purchasing managers' indices (PMIs) suggesting a potential slowdown in manufacturing. However, markets seemed to have largely priced in this weakness, resulting in flat to slightly positive performance for European stocks.

Turning to fixed income, US rates dipped modestly, aligning with the disinflationary theme but also possibly pointing to a weaker US economy. In contrast, Australian rates remained stubbornly high, with the spread between US and Australian 10-year yields narrowing with both now holding steady just above 4%. This persistent upward pressure on shorter-term rates (2-3 years) is likely to keep Australian mortgage rates elevated in the near term.

Within the Australian market, small caps managed to eke out gains, while larger caps, particularly banks and miners, found themselves in negative territory. REITs and infrastructure stocks also displayed defensive characteristics, possibly indicating a shift in market sentiment.

One notable laggard in the Australian market was the healthcare sector, which took a hit following the release of clinical trial results for Eli Lilly's obesity drug. The study showed that around 50% of sleep apnea sufferers experienced significant improvements after taking the medication. While the implications for valuations remain unclear, this development has certainly caught the attention of investors although many fund managers are maintaining that this shoudn't affect the outlook for Resmed, which was down 12% on the news.

As we approach the end of the financial year, it's worth taking a step back to assess the bigger picture. The NASDAQ's 30% surge over the past 12 months has been a key driver of global market performance, with the S&P 500 also posting a solid 20% gain. Other top performers include gold and Japanese stocks, while Europe and cyclical sectors have delivered more modest returns in the 10% range.

Volatility has been a constant companion throughout the year, with markets oscillating between Goldilocks scenarios (disinflation and positive economic news) and periods of uncertainty driven by shifting interest rate expectations. This volatility has posed challenges for active managers, many of whom have underperformed their passive counterparts due to a reluctance to embrace stretched valuations.

Looking ahead, investors will need to grapple with the valuation dilemma: whether to focus on cheaper, less volatile stocks or maintain exposure to high-growth quality names that have demonstrated economic resilience. As the InvestSense team digs deeper into these themes in the coming weeks, we expect to release a year end paper covering these issues and looking to the year ahead.