In our quarterly Economic & Market Update Newsletter, we separate the relevant from the noise, to bring you timely content that helps you on the path to and through retirement!
2nd Quarter 2024 Commentary
Stock Market Update
Stocks have been in a new bull market since October 2022 and have risen to all-time highs. During this period, the S&P 500 Index has risen 33% with most of the gains coming from big tech companies. So far this year, the S&P 500 Index is up 14.5%. Of that, 5% can be attributed to Nvidia, 5% to the other magnificent six stocks (Microsoft, Facebook now Meta Platforms, Amazon, Alphabet, Tesla, Apple), and the remaining 4.5% to the other 493 S&P 500 stocks!
It’s a very unbalanced stock market, driven mostly by expected productivity and profit gains from artificial intelligence (AI). The largest tech titans are expected to spend over $200 billion this year, and even more next year on AI infrastructure. We believe that we are in the early innings of tremendous technological change. This will vastly improve productivity, corporate profits, medical advancements, scientific discoveries, etc.
From a strategic perspective, we continue to focus on maintaining diversification and investing in stocks that exhibit strong fundamentals and a history of consistent and growing dividends. While the current market can be classified as a bull, those gains are rather concentrated in certain companies and sectors. In scenarios like this, it is important to maintain diversification and resist chasing stocks that are trading at prices that may soon prove to be too expensive.
Economic Update
We remain cautiously optimistic about the economy because earnings continue to surprise on the upside, consumers remain strong and resilient, and there are no signs that a recession is imminent, particularly since unemployment is so low. While many anticipate a Fed rate cut is coming in September or December, there is a school of thought that a rate cut in an economy performing this well could re-trigger inflation concerns. If economic activity slows down in the second half of the year, we expect that the Fed will lower rates to prop up the economy.
The likely result of the current deficit problem is that inflation will stay higher for longer than most people anticipate. An inflation rate somewhere in the range of 3.5% to 4.5% is realistic.
Bond Market Update
Our strategic approach to fixed income investing remains keeping maturities short, less than five years if possible. Shorter maturities are generally paying better interest rates in the current environment and carry much less interest-rate risk (the decline in bond prices when interest rates rise). The combination of higher income and less risk makes short-term and intermediate-term bonds attractive in this current environment.
Government Impact
One of the biggest investor concerns right now is the huge government deficit. The government deficit is projected to be about $2 trillion in 2024. That means that the government will spend about $2 trillion more than it will bring in from tax revenue for this year alone. This kind of spending is inflationary and unsustainable.
The U.S. government now spends more on interest payments on debt than it spends on national defense. The deficit is not an imminent threat to the economy and the markets, but it is a serious, long-term concern, and one that will likely become a crisis in the coming years if not adequately addressed.
Tackling our national debt problem, or at least stopping the bleeding, is going to require some combination of increasing tax revenue, tax cuts, and/or stronger economic growth, and reducing expenses, which means walking back government spending in a lot of different areas. The government already devotes much of it’s spending to entitlement promises like social security and Medicare, so this will be a very unpopular problem to tackle.
The Bottom Line…
Stocks have rallied 14.5% in 2024 to new all-time highs on the back of big tech and AI spending. We remain cautiously optimistic because of strong earnings, consumer strength, and no clear signs of a recession. For equities, our greatest concern is investor behavior and avoiding the tendency to chase returns while inadvertently increasing risk. Regarding fixed income, we worry about huge government deficits, which likely will cause elevated inflation for years to come. Future interest rate directions will factor in heavily to the economy, inflation, and valuations for both stocks and bonds.
