July 2024 Market Commentary
SUMMARY
The S&P 500 continues to reach new levels driven primarily by the top 5 stocks: NVIDIA, MICROSOFT, ALPHABET, AMAZON, and META. Artificial Intelligence appears to be the underlying theme driving the valuations for the top stocks, as the top 10 stocks represent over 36% of the total value of the S&P 500 stocks. Other sectors have experienced positive but much less enthusiastic attention producing lower returns for the 1st half of 2024.
The U S is now in full swing of the Presidential election cycle and we’ve witnessed several key political allies (e.g., England, France) change the direction of their governments. We believe this has resulted in a wait-and-see attitude for many global investors.
Concerns remain over the serious unrest in several hotspots around the world which causes us to continue our defensive and diversified portfolio strategy.
We look for another positive year for U.S. stocks during 2024 but remain attuned to the “noise” created by the U.S. Presidential election cycle. So, we believe portfolios should remain diversified and look to take advantage of the current opportunities in the bond market to capture interest rate yields by extending maturities along the yield curve.
Positive Indicators for 2024:
- Inflation indicators are declining but remain above the FED target.
- US economic strength seems to be driven by Government spending on infrastructure and social programs.
- Fed actions to reduce interest rates may be deferred to later this year or even into 2025.
Caution Indicators for 2024:
- We remain concerned about geopolitical concerns.
- The Presidential election cycle will be a distraction for the markets.
- Inflation remains above the Federal Reserve target.
- Price to Earnings ratios (valuations) are rising.
- The S&P 500 is now a concentrated index.
INFLATION AND CENTRAL BANK POLICIES: Inflation appears to have settled into an annual rate of around 3.3% (as of June, 2024) and is very slowly declining toward the Fed’s stated target of 2%. As long as inflation remains above the stated target, the Fed is unlikely to begin reducing interest rates. The markets, then, will remain focused on the Fed looking for any indication that there may be some easing. Consumers continue to feel the impact of rising prices and shrinkflation that we mentioned in our last commentary. Despite the ever-present underlying inflation, the economy, in general, appears to be strong probably due to the massive Government infrastructure spending still filtering through the local and state governments.
FISCAL AND TAX POLICIES: Fiscal Policy remains stalled as we now enter the next election cycle. We do not expect any significant fiscal or tax changes in 2024. Congressional spending for foreign assistance and weather-related emergencies continues to increase the fiscal deficit now approaching $35 trillion exceeding US GDP of $28 trillion. Current tax brackets are set to expire at the end of 2025!
OIL PRICES: Oil prices have stabilized in the low-mid $80/bbl recently and is spurring commodity and precious metals prices to move higher. Summer demand for travel may drive gas prices higher in the short term.
VALUATION: The S&P 500 has become concentrated over the past 2 years. The top 5 stocks in the S&P 500 represent 63% of the 15.3% total return for the first half of 2024. There are several very expensive stocks within the index (Trailing P/E’s over 40%) but the overall index appears to be reasonably priced in the mid 20’s. Small cap stocks now have attractive valuations and are among the sectors that we may be increasing allocations within individual portfolios.
BONDS: The US Treasury yield curve remains inverted - which usually precedes a slowing economy; however, the curve has been inverted for several months. Laddering and extending maturities in most portfolios remains a strategy we are engaging in a disciplined manner.
NON-US STOCKS: We remain cautious regarding non-US stocks. However, stock valuations are significantly cheaper overseas. There may be opportunities ahead, depending on each client situation, to invest in developed international and emerging markets.
STYLE SHIFTS: AI has continued to fuel the growth sector. We remain defensive in most portfolios favoring more value weighted stocks due to the high risk of uncertainty in the market.
INVESTMENT STRATEGY FOR THE REMAINDER OF 2024
Fixed income strategies are a current focus of portfolio realignment.
We believe most clients will benefit from a diversified equity-oriented portfolio and are continuing to view a defensive portfolio weighting as appropriate in most portfolios.
We expect to deploy investable cash in portfolios into the markets in a manner consistent with individual client portfolio objectives.
This commentary is based on the author’s opinion as of July 1, 2024 and are subject to change based on fluctuating conditions.