Effective Date: June 30, 2024
SUMMARY
Portfolios saw modestly positive returns for the quarter, building on the strong performance from the first quarter to maintain robust year-to-date gains. Benchmark asset classes presented a mixed picture, highlighting the two key market trends for 2024. The S&P 500 gained over 4% for the quarter and is up 15% year-to-date, driven by the strong performance of large technology companies capitalizing on the emerging AI trend. In contrast, the Russell 2000 index, representing smaller and more economically sensitive companies, declined for the quarter, and posted only slight gains for the first half of the year reflecting shifting expectations about Federal Reserve interest rate cuts. Emerging international markets performed well, and Europe and Asia posted small gains. Interest rates edged up during the quarter, resulting in small losses for bonds both quarterly and year-to-date. Our strategy this year has focused on maintaining your portfolio close to long-term target allocations. In July, we will rebalance qualified accounts and make minor adjustments to position weights.
INDEX RETURNS YEAR-TO-DATE
S&P 500
Russell 2000
MSCI EAFE International
MSCI EM Emerging Markets
Barclays Aggregate Bond
10 YR Treasury Yield
15.2%
1.6%
6.5%
7.2%
-1.3%
4.4%
The S&P 500 is up 15% year-to-date, largely driven by large tech companies benefiting from AI trends. NVIDIA, Microsoft, Meta, and Amazon are up over 20% year-to-date, with NVIDIA surging 146%. Comparisons to the 2000 tech bubble are understandable but differ significantly. Today's tech giants are profitable with earnings largely supporting their stock prices. The hype around AI appears justified based on promising increased efficiency and profitability. Many experts suggest we are merely in the early stages of AI adoption. Market-cap-weighted portfolios benefit from the strength of these technology companies, unlike many other portfolio strategies.
Conversely, the Russell 2000 and developed international indices struggled due to changing expectations of monetary policy and economic growth. Persistent economic growth has tempered expectations for interest rate cuts. At the beginning of the year, markets anticipated six Fed rate cuts compared to new expectations of only one or two. We anticipated this shift, believing market expectations for rate cuts were overly optimistic and that the economy would be more resilient. A strong and stable economy is preferred over significant rate cuts, though modest interest rate adjustments may help the housing market.
MARKET INDICATORS & OUTLOOK
Positive
Market momentum
Market indicators
Monetary policy
Neutral
US Economy & Earnings
Inflation
US equity valuations
Interest rates
Negative
Israel & Ukraine wars
Investor sentiment
The market indicators table remains unchanged this year and our outlook is optimistic, based on a strong and stable economy. While the economy has softened slightly due to higher interest rates, inflation has recently improved. The Fed's preferred inflation measure, the PCE index, showed no increase for June and a 2.6% year-over-year rise edging closer to the Fed's 2% target. Further progress could allow the Fed to ease rates later this year and alleviate pressure on interest-sensitive sectors. Despite bonds having small year-to-date losses, we believe bonds may have modestly positive returns for the entire year.
Quantitative indicators also support our optimism. Historically, markets tend to rise after the Fed's first rate cut, especially when cuts occur with markets near all-time highs. A second positive quantitative indicator, according to Ryan Detrick, since 1950, when markets have been up over 10% by mid-year the rest of the year is positive 83% of the time, with full-year positive returns 100% of the time. While these indicators are not foolproof and past results are not a guarantee of future returns, they provide valuable context.
Caution is warranted due to geopolitical risks, including regional conflicts in Ukraine and the Middle East and China's actions toward Taiwan. A significant escalation in any of these situations could shock markets. Many investors are anxious about the upcoming US presidential and congressional elections, and they will impact tax future policies. Major provisions of the TCJA of 2017 expire the end of 2025, potentially increasing taxes on everyone unless new legislation is passed. It is also becoming increasingly important for the next administration to addresses deficits and the US national debt. Any new major tax bill or deficit reduction plan could impact future economic growth and markets.
PORTFOLIO IMPLICATIONS & RECOMMENDATIONS
The aim is to keep your portfolio near long-term targets and rebalance as needed to manage risks outlined in this update. We will rebalance all qualified accounts in July if allocations are outside acceptable ranges. The allocation to US large-cap equities will be reduced by 2% and small and mid-cap US equities will be increased, which have better valuations and potential upside. In addition, we will reduce the allocation to TIPs and increase the allocation in corporate bonds, which offer better potential returns with declining inflation.
