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Dear Friends,
As we reach the halfway point of 2024, most would not have predicted that we would start another year with double digit gains in the US stock market, especially considering we have not yet seen a cut in interest rates. Despite the strong market performance, there is still a backdrop of uncertainty as a pivotal general election approaches this November, and numerous issues (both new and old) continue to plague the markets and world economy.
As of market close on the last day of second quarter (Friday, June 28th), market index returns this year are as follows:
Dow Jones Industrial Index: +4.25%
S&P500 Index: +15.08%
Russell 2000 Small Cap Index: +1.74%
ACWI ex-US All World Index: +6.18%
US Aggregate Bond Index: -2.1%
On the economic front, consumer spending has softened this summer, and inflation has slowed significantly as companies and consumers alike begin to feel the pinch of higher interest rates. In the month of May, core CPI – including volatile food and energy prices – came in at just .14% adjusted month over month. Stretched out over 12 months, this would be on pace to reach the Federal Reserve’s 2% annual inflation target.
Real estate prices continue to stay elevated at 6% growth annually but rent growth has reduced to 2%. There are strong indicators we’ll continue to see inflation come down in the months to come, which could empower the Federal Reserve to consider a long-anticipated interest rate cut to accomplish its “soft landing” goal while avoiding a recession. Some experts argue we are living in a “soft landing” right now, but Chair Powell and the Federal Reserve remain cautiously resilient in achieving their 2% inflation rate target. Even if the Federal Reserve doesn’t cut interest rates by the end of this year, companies seem to have adjusted to the tighter monetary policy environment, and they continue to deliver growth that’s beating expectations in many sectors.
Despite the good news on inflation and the relative strength of the economy, we continue to see a market filled with pockets of winners and losers. Much of the stock market rally this year can be attributed to the “Magnificent 7” large cap growth stocks, which now account for more than one third of the S&P500 index by market weight.
Some investors who have been around for multiple cycles have mentioned that it’s starting to feel like the late-90’s technology boom and bust known as the “Dot-Com Bubble”. This is due to the hype around artificial intelligence, which has driven companies like Nvidia and Microsoft to record highs this summer.
Although it’s still too early to tell if we are due for another pullback, one key difference between this recent rally and the Dot-Com Bubble is that big companies now being driven by “AI Fever” are also the ones delivering the most impressive earnings growth year over year.
So, while it is hard to say how much longer large cap tech can keep propelling the market, indications are that it’s here to stay. We will likely continue to see volatility in stock and bond markets as we head into election season, but so far, most signs point to a broadening of the market rally in months to come as other sectors race to catch up.
At IEM, our investment strategy remains consistent despite the many changes in the market and economy over the last several quarters. We continue to focus on index and low-cost funds as a central part of our strategy, because we believe in diversification and keeping internal costs low for our clients to avoid a fee drag on long-term performance.
We continue to emphasize our forward-looking approach, cautioning against short-term trends, and rebalancing our portfolios when it makes strategic sense. From our perspective, we believe this approach helps our clients not to be overexposed in certain areas.
Due to the changes we’ve seen in large cap equities this year, we’re rebalancing our qualified portfolios back to target by adjusting the proportions of equities and adding to our fixed-income side. We believe this adjustment is positioned well for the months to come as interest rates remain elevated and, hopefully, eventually come down.
With higher interest rates, we are seeing more attractive income opportunities in corporate and high-yield bonds, so we’re adding these positions to our fixed-income portfolios seeking increased income for clients. We prefer domestic growth equities over value-oriented companies while maintaining a balanced approach that invests across all sectors and market caps. Our Investment Committee voted to reduce our portfolio cash targets from 2% to 1% while adding to bonds due to their more attractive risk-return profile.
While thoughtful investment management is central to our approach, without proper financial planning, investments are only one piece of the puzzle. At IEM we love helping our clients piece together the entire puzzle, and planning for what’s important to them is how we do that.
If you or anyone you know wants to learn more, please don’t hesitate to reach out to our advisor team, we are always here to serve YOU.
Sincerely,
Ted Smith, Founder & Chairman, RHU, CLU®, ChFC®
Danica Goshert, Senior Vice President, CFP®, AIF®, MBA
Dan LaNasa, Associate Vice President, CFP®
Charles Stewart, Associate Vice President, CFP®
Marcus Schaller, Manager of Financial Planning Services, CFP®, APMA™
Disclosure: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.
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