Dear Friends,
Financial markets have been mixed this year but generally good. The S&P 500, and especially the NASDAQ, have risen to all-time highs powered primarily by a limited number of large cap technology stocks (Microsoft, Nvidia, et al). The rest of the stock market has been solid but not great. The S&P 500 was up 15% through June 30th, while small and mid-cap stocks only generated low to mid-single digit returns. Bond markets have been difficult thus far; higher yields have been offset by lower prices resulting in relatively flat returns for the bond market in total.
Regarding economic conditions: Inflation has moderated to close to 3% and looks to be continuing to slowly move down. This is welcome news but doesn’t ease the pain for consumers who are paying substantially higher prices for most everything than they were paying five years ago. We went into the year with many “experts” anticipating that the Fed would cut interest rates up to six times this year; there have been zero cuts thus far. Interest rates, including mortgage rates, remain higher than we’ve seen in a generation, and this has also been a negative with regards to consumer sentiment, particularly around the real estate industry.
Despite the negative sentiment over both inflation and interest rates, the economy has continued to be relatively strong. Corporate earnings growth has been solid and consumer spending has mostly held up, particularly spending for services including travel and leisure. We are seeing the first signs of a mild slowdown in the economy; unemployment is over 4% for the first time since January 2022, consumer spending may be at an inflection point and the real estate market continues to struggle. Having said that, hopes remain high for a relatively “soft landing” for the economy. The Fed has the dry powder to ease monetary policy by cutting rates; the only real question is the timing and the extent of any cuts.
Our outlook for financial markets remains very positive on balance. Potential headwinds include stock market valuations at above historic levels, particularly for the large cap growth segment of the market, and the potential for stubborn inflation which keeps interest rates higher for longer. Another potential short-term headwind is the uncertainty and volatility associated with upcoming elections. Regardless of whose side you’re on, markets do not like uncertainty. The good news: historical data provides evidence that there is no meaningful correlation between the political party in control and market returns. Furthermore, election seasons have tended to end well for investors by reducing uncertainty. Our advice: cast your votes at the polls; not with your portfolio.
While higher than average valuations and the election season make it more difficult for us to chase the rally that we’ve had this year, we are very encouraged by the secular trends that are setting up to shape the economy and financial markets. First of all, the backdrop of moderating inflation and lower interest rates is very positive for the economy and for both stocks and bonds. Second, we are on the verge of potentially dramatic increases in personal and business productivity made possible by breakthroughs in AI technology. Thus far, the beneficiaries of AI have been primarily the creators of the technology; in the future it will be the users who stand to gain the most in terms of productivity and earnings growth.
If we do get a selloff or correction in the near term as a result of valuations, economic slowdown or even the election, we will absolutely view that as a buying opportunity. Nothing has changed our view that the best run companies in the world will continue to find a way to grow their revenues, earnings and shareholder value.
Follow the link below for more color on the 2nd quarter economy and financial markets:
Quarterly Market Insights: Q2, 2024
Let us know if we can do anything for you. Thanks for your encouragement and support.
Matt and Andrew