Q2 2024
Dear Client,
We hope you had a pleasant July 4th holiday and are enjoying some time with family and friends this summer! Thus far my summer has been filled with bikes, hikes, grilling, and pool time, in addition to my usual perseverating on the condition of the economy and markets. If you have the desire this summer to review your financial picture, and/or want to discuss it with us, please let us know. We are available for meetings, zooms, or phone calls, and would love to hear from you.
To the casual observer, the markets have continued to show a strong façade, and index returns have been positive. Looking a little deeper and framing things in the context of valuation, as well as our never-ending search for what will go wrong next, gives a bit more cause for caution. As ever, we are trying to balance our natural inclination to be cautious with your investments, with the market forces that are still maintaining a seemingly relentless march higher.
The index numbers for the quarter are as follows (calculated from wsj.com/market-data):
S&P 500 change: 3.85% Q2, 15.07% Year to date (YTD)
S&P 500 Equal Weight Index: -3.09% Q2, 4.6% YTD
Nasdaq Composite change: 8.15% Q2, 19.22% YTD
Nasdaq Composite Equal Weight Index: -0.7% Q2, 5.8% YTD
Dow Jones Industrial Average change: -1.73% Q2, 4.13% YTD
Ten Year Treasury Yield change: 2.57% Q2, 9.42% YTD
Crude Oil (WTI Front Month Contract) change: -1.92% Q2, 13.71% YTD
Gold (GLD ETF) change: 3.03% Q2, 12.31% YTD
Clearly, the rally overall slowed from the torrid pace of the previous two quarters. However, the broader indices pushed higher, especially the Nasdaq tech index, mainly powered by bets on the future of Artificial Intelligence. We have often referenced the equal-weight indices as indicators of whether the market was being driven by just the few largest stocks, or by a broader cross-section of companies/stocks. In this case, the quarter’s returns were very focused on the few largest stocks. The equal weight indices not only didn’t keep up but showed negative returns for the quarter in contrast to the positive returns for the broader indices. This concentration and divergence is cause for concern. While the largest stocks that are driving the returns of the indices are good companies, the valuation of their shares must reach a limit at some point. When that time comes, the indices will need to either be led on by the remaining companies, or there will be a correction. The size and severity of the correction will depend on the specifics of the situation, but generally, the farther we range out of “normal” the farther we must correct back to “normal”.
Outside of those market internal indicators, the economy has continued its march, confounding those calling for recession. The rate of inflation has slowed, and job creation has slowed moderately, but growth overall has remained positive. This is the ideal combination for a “soft landing” and the expectation of that coming to fruition has increased. As a result of the soft-landing scenario becoming more likely, the expectation of sooner and more frequent interest rate cuts from the Federal Reserve has decreased. The market is now expecting a 0.25% cut in September and possibly a second before the end of the year. Interestingly, the drastic revision in expectations for decreasing interest rates has not stopped the market rally which was initially based on the expectation of early and frequent interest rate cuts this year.
The elephant in our collective conscious right now, must be the looming presidential election. We have spent a good deal of time thinking about the various possible scenarios, as have most market watchers and investors. While there are causes for concern for the markets under several different scenarios, our experience and historical observation tells us that the general trend of the economy and growth is ultimately more important for the path of the markets than is the outcome of the election.
As always, there are many more topics which we could delve into, but we try to keep this note brief in the interest of preserving your valuable time. We hope that this will encourage you to reach out if you are so inclined, so we can discuss topics of particular interest/relevance to you and your finances.
We wish you all the best this summer and we hope you will rest-easy, knowing that we are working hard on your behalf.
Best Regards,
Bo and Lesley
