Quarterly Newsletters
Quarterly Newsletter for the 2nd Quarter 2024
The second quarter of 2024 saw continued resilience in the U.S. economy and the financial markets as it seems to be building on the momentum from earlier this year and 2023. On a price return basis, as of June 30, 2024, the Dow Jones Industrial Average (DJIA) was up 3.79% for the year, but it did lose 1.73% in the second quarter. The Standard and Poor’s 500 (S&P 500), on the other hand, was up 14.48% for the year and up 3.92% for the quarter, as was the NASDAQ which was up 18.13% for the year and 8.26% for the quarter. The MSCI All Country World ex-US Index lost 0.01% for the quarter, while showing a positive return of 4.03% for the year. In the fixed income environment, the Barclays Merrill Lynch 3-month Treasury Bill Index yielded 2.63% while the Bloomberg Aggregate Bond Index actually dropped 0.28% through June 30.
Fixed Income Market (Bonds): The Federal Reserve, in its efforts to push inflation rates down to 2%, maintained its cautious stance throughout the second quarter. It kept interest rates steady at 5.25% to 5.5%. Investors that expected up to eight rate cuts this year are now hopeful to receive two cuts by year end and five rate cuts over the next 12 months. As we have stated in past newsletters, the FOMC (Federal Open Market Committee or the Fed) has raised interest rates 11 times in 18 months- from 0% to over 5%. Their goal was to stop the rampant inflation that existed at the time. Hindsight, being 20/20, indicates that the Fed waited too long to begin raising interest rates and let inflation get out of control. Now, the Fed’s goal is to lower interest rates in such a manner as to orchestrate a “soft landing”. This, in economic terms, is when a central bank, like the Federal Reserve, can reduce inflation and cool the economy without causing a recession. A soft landing has only been accomplished once, arguably, in 1994 when other episodes on inflation were winding down. There seems to be no doubt that the Fed will lower interest rates- the question is when. Economic policy works with a long and variable lag period. The Fed cannot afford to wait too long to begin reducing rates. Although a rate cut is possible in July, we believe, as does the market, that the first interest rate cut will come during the Fed’s September meeting. Of course, this is data dependent.
US Equity Market (Stocks): Lead by large-cap growth stocks, the S&P 500 delivered positive results in the second quarter. The S&P Mid Cap 400 and the S&P Small Cap 600, however, both dropped slightly more than 3% in the quarter. Of some concern is the fact that excluding the returns of the “Fab 4” (Microsoft, NVIDIA, Amazon and Meta), the year-to-date return of S&P 500 would be about 6.6%- versus its actual return of about 15.5%. Additionally, the Fab 4 plus Apple account for 25% of the S&P 500’s total market cap. Obviously, this indicates that there is a great deal of market concentration which, in the long run, could be a real concern. The presidential election is also a concern for the stock market. The markets do not like uncertainty and the race for control of the oval office and the congress is always uncertain. The chaos within the Democratic party in terms of its ultimate candidate for president has exacerbated that uncertainty. Despite the above, the market has remained confident and resilient. The S&P 500 has hit 38 all-time highs this year. The CPI (Consumer Price Index) and the PPI (Producer Price Index) are showing very encouraging signs. The U.S. economy is strong and corporate earnings forecast are predicted to be robust. The labor market remained tight but showed signs of loosening as compared to a year ago. These factors, coupled with the expectations or hopes of a soft landing, all signal a positive atmosphere for the U.S. equity market through year end. Of interest is the fact that the market has always shown positive returns following a presidential election.
Overseas Equity Market (Stocks): Geopolitical pressure remains prevalent around the world. The wars in Israel and Ukraine continue to be a concern. The MSCI All Country World Index had a positive quarterly return of almost 3% simply because of the U.S. influence. The U.S. markets accounted for 64% of the total global or all world equity market . The emerging market produced about a 5% return, despite China’s sluggish growth and its heavy weighting within the emerging market index. Asian markets were particularly strong. Japan markets are up 21.5%, Taiwan markets are up 37%, and India markets are up 17% year to date. Unlike the Fed, the trend among several central banks around the world, including Canada, Switzerland and the ECB (European Central Bank) was to cut interest rates as inflation slowed worldwide. International equity valuations are substantially less expensive than U.S. valuations. The average P/E (Price/Earnings Ratio) of the S&P 500 is currently 21.1. By contrast the P/E of the MSCI is 14.2 and the P/E of the MCSI Emerging Market is 12.2. This makes overseas investing an attractive option.
Conclusion: The remainder of 2024 is expected to be quite eventful as the markets focus on the Fed rate cuts, the upcoming earnings season, and the upcoming presidential election. We believe the U.S. stock market will remain resilient and produce positive results through year end; thus, we remain positive about the market. The Fed should begin to lower interest rates, and this will be a plus for the equity market as well as the fixed income market; thus, we continue to favor short-term fixed income and the intermediate term fixed income markets. Finally, on the overseas front, we continue to remain positive on developed international stocks and think that emerging markets may be appropriate for a percentage of one’s portfolio- should it meet your risk tolerance.
In closing, permit us to express our sincere appreciation for the opportunity to be of service to you. As always, should you have any questions or wish to discuss the above in more detail, please do not hesitate to contact us.