“God Bless America”
Happy 4th of July to all and I hope you’re all enjoying the start of your summers with family and friends. As I sit here in my office on 4th of July , while my family and friends are enjoying the beautiful day and celebrating our Independence, I will join them later this afternoon. I reflect on how far we have come since the dark days of the pandemic and how America, the best nation full of freedom and liberty, has moved forward and has returned us to the wonderful lives we all enjoy so much. As I predicted in early 2020 that we would, as a nation, figure out how to move forward and return to our day-to-day lives. For that and living in the greatest place on earth, “God Bless America.”
The first half of 2024 has continued in the same fashion that 2023 ended. The S&P 500 index has continued to reach new highs as well as the NASDAQ index while most markets have been left behind. Some fixed income markets are once again negative for the year. The S&P 500 is being led by the magnificent seven stocks which have accounted for more than 60% of the return YTD with the equal weighted S&P 500 lagging by more than 12%. Dow Theory has failed to confirm new highs, the yield curve is still inverted, and the Leading Economic Indicators(LEI) have been negative 26 of the past 27 months. The big debate is are we headed for a soft landing, a no landing or a hard landing? Either way, we as a firm are comfortable with our investments, our positioning in our models and have ample dry power to deploy if needed. Our conservative approach has worked well for us the last 20+ years and we maintain the same approach moving forward. The two greatest emotions of “FOMO,” fear of missing out and “FOLE,” fear of losing everything must be diligently respected, and we believe we do that well.
Pros and Cons
Below are some items we are watching as we head into the second half of 2024.
Pros:
- US money markets reached an all-time high of $6.12 trillion. Potential for investment into risk assets.
- AI Technology Revolution, the Fourth Industrial Revolution driving a massive capital investment spend
- Inflation, though sticky, has been moderating
- Earnings for the S&P 500 have been expanding
- US Job Openings have normalized
Cons:
- US money markets reached an all-time high of $6.12 trillion. Money markets tend to peak prior to or during a recession.
- The 3 Month Treasury Yield and the 10 Year Treasury Yield curve have now been inverted for over 620 days
- The LEI, Leading Economic Indicators, has been negative 26 of 27 months
- The Israel-Hamas war could expand to a much larger regional conflict
Conclusion
As we head into the second half of 2024, I cannot ignore the constant media and commentaries clamoring for an interest rate cut to the federal funds rate. Are equity markets’ valuations too high that they need an interest rate cut? Is the economy slowing more rapidly? Is employment going to fall off a cliff? Or is everything ok? I do not know the answers to those questions or what shoe could potentially drop, but what I do know is: When the Fed has shifted from a more restrictive posture to a more accommodative posture it is generally a reaction to a deterioration in the macro environment. The results of those interest rate cut to the federal funds rate most often result in some notable market pullbacks ranging from as small as -5% to as large as a -55% drawdown to the S&P 500 index. So, as we proceed through the year with caution, we emphasize that we invest with the primary focus on our financial planning, goals and risk tolerances while looking to take advantage of market dislocations to make your portfolios even better.
Thank you and have a great summer,
Nick