An American in Paris (Lost in translation while in a dental chair)
Dear Clients and Friends,
“Paris, the City of Lights,” they say. But for me, it became the City of Unintelligible Dental Terms. Picture this: I’m writhing in pain, clutching my jaw, and desperately seeking an emergency root canal. The catch? My French vocabulary extends to “bonjour” and “croissant.” As I sat in the dentist’s chair, surrounded by unfamiliar words, I realized how similar this experience was to deciphering financial jargon.
Just like that dental appointment, financial advisors often use terms like “alpha,” “beta,” and “standard deviation.” You may nod, smile, and pretend to understand, but deep down, it’s like watching a foreign movie without subtitles. Sure, you grasp the basic plot—the market goes up and down—but the nuances elude us. And that’s where the danger lies.
Political uncertainty amplifies this language barrier. Just as I couldn’t communicate my pain effectively in Paris, investors struggle to navigate volatile markets during uncertain times. We hear phrases like “quantitative easing” or “fiscal stimulus,” but do we truly comprehend their impact? It’s akin to knowing the movie’s genre but missing the subtle plot twists.
Speaking of politics, yet carefully avoiding the third rail to never discuss…
“In Your Guts You know He’s Nuts”, rings like a contemporaneous political slogan that could be applied to either candidate. However, this was a Lyndon B. Johnson credo in his 1968 election versus Barry Goldwater. A bit tame though when we compare the 1928 Democratic nominee’s Alfred E. Smith’s slogan, “Make all your wet dreams come true” (he wanted to repeal prohibition)
1928 &1968 were very interesting and pivotal moments in American History. I cite these elections because they also occurred at the moments of political uncertainly. Both of these elections were preceded by some very good economic years. Post-election 1929 marked the start of the Great Depression and the markets collapsed 90% in 3 years! Fast forward 40 years to 1969 and the markets plummeted 34% (although the NY Mets won the world series!). Are you noticing a 40-year pattern here? Despite the rather tame Obama slogan of “Change”, in 2008, the market suffered a 20% drop.
My deduction: Unless you hear from us differently, we may want to take profits in 2047. Of course, I say that facetiously, as plenty can happen in that timeframe but here is my very important message:
Let us learn from my dental mishap. Make sure we translate complex financial concepts into plain language. Understand the nuances beyond the surface. Because just as a root canal saved my tooth, having a definable, repeatable, and measurable approach to your investments, can help you reach your financial goals.
And now back to our regularly scheduled newsletter…
Quarterly Insights – July 2024
Expected Rate Cuts, AI Enthusiasm and Falling Inflation Push the S&P 500 to New All-Time Highs
The S&P 500 experienced its first real dose of volatility early in the second quarter, but expectations for interest rate cuts by the Federal Reserve, solid economic growth and continued strong financial performance from AI-related tech companies ultimately pushed the S&P 500 to new all-time highs and the index finished the quarter with strong gains.
While the S&P 500 hit new highs in the second quarter, the month of April was decidedly negative for markets as fears of no rate cuts in 2024 (or even a rate hike) pressured stocks. The catalyst for these concerns was the March Consumer Price Index (CPI), which rose 3.5% year over year, higher than estimates. That hotter-than-expected reading reversed several months of declines in CPI and ignited fears that inflation could be “sticky” and, if so, delay expected Fed rate cuts. Those higher rate concerns were then compounded by comments by New York Fed President John Williams, who stated rate hikes (which investors assumed were over) were possible if inflation showed signs of re-accelerating. The practical impact of the hot CPI report and William’s commentary was to push rate cut expectations out from June to September and that caused the 10-year Treasury yield to rise sharply, from 4.20% at the start of the quarter to a high of 4.72%. Those higher yields pressured the S&P 500 in April, which fell 4.08% and completed its worst month since September.
On the first day of May, however, the Fed largely dispelled concerns about potential rate hikes and ignited a rebound that ultimately carried the S&P 500 to new highs. At the May 1 FOMC decision, Fed Chair Powell essentially shut the proverbial door on the possibility of rate hikes, stating that if the Fed was concerned about inflation, it would likely just keep interest rates at current levels for a longer period instead of raising them. That comment provided immediate relief for investors and both stocks and bonds rallied early in May as rate hike fears subsided. Then, later in the month, the April CPI report (released in mid-May) rose 3.4% year over year, slightly lower than the 3.5% in March and that resumption of disinflation (the decline in inflation) further increased expectations for rate cuts in 2024. Additionally, employment data moderated in May, with the April jobs report coming in below expectations (but still at healthy levels). The practical result of the resumption of disinflation, the supportive Fed commentary and moderating labor market data was to increase September rate cut expectations, push the 10-year Treasury yield back down below 4.50% and spark a 4.96% rally in the S&P 500 in May.
The upward momentum continued in June thanks to more positive news on inflation, additional reassuring commentary from the Fed and strong AI-linked tech earnings. First, the May CPI (released in mid-June) declined to 3.3% year over year, the lowest level since February. Core CPI, which excludes food and energy prices, dropped to the lowest level since April 2021, further confirming ongoing disinflation. Then, at the June FOMC meeting, Fed Chair Powell reassured markets two rate cuts are entirely possible in 2024, reinforcing market expectations for a September rate cut. Economic data, meanwhile, showed continued moderation of activity and that slowing growth and falling inflation helped to push the 10-year Treasury yield close to 4.20%, a multi-month low. Finally, investor excitement for AI remained extreme in June, as strong AI-driven earnings from Oracle (ORCL) and Broadcom (AVGO) along with news Apple (AAPL) was integrating AI technology into future iPhones pushed tech stocks higher and that, combined with falling Treasury yields and rising rate cut expectations, sent the S&P 500 to new all-time highs above 5,500.
In sum, markets impressively rebounded from April declines and the S&P 500 hit a new high thanks to increased rate cut expectations, falling Treasury yields and continued robust earnings growth from AI-linked tech companies.
Second Quarter Performance Review
The second quarter produced a more mixed performance across various markets than the strong return in the S&P 500 might imply, as AI-driven tech-stock enthusiasm again powered the Nasdaq and S&P 500 higher while other major indices lagged. The Nasdaq was, by far, the best performing major index in the second quarter while the S&P 500, where tech is the largest sector weighting, also logged a solidly positive gain. Less tech focused indices didn’t fare as well, however, as the Dow Jones Industrial Average and small-cap focused Russell 2000 posted negative quarterly returns.
By market capitalization, large caps outperformed small caps in Q2, as they did in the first quarter of 2024. Initially, higher Treasury yields in April weighed on small caps, while late in the second quarter economic growth concerns pressured the Russell 2000.
From an investment style standpoint, growth massively outperformed value in the second quarter, as tech-heavy growth funds once again benefited from continued AI enthusiasm. Value funds, which have larger weightings towards financials and industrials, posted a slightly negative quarterly return as the performance of non-tech sectors more reflected growing concerns about economic growth.
On a sector level, performance was decidedly mixed as only four of the 11 S&P 500 sectors finished the second quarter with positive returns. The best performing sectors in the second quarter were the AI-linked technology and communications services sectors. They posted strong returns, aided by better-than-expected earnings results from NVDA, ORCL, AVGO, TSM, MSFT, AMZN and others as AI enthusiasm continued to push the broad tech sector and S&P 500 higher. Utilities also logged a modestly positive quarterly return, as the high yields and resilient business models were attractive to investors given rising concerns about future economic growth, while declining Treasury yields made higher dividend sectors such as utilities more attractive to income investors.
Turning to the sector laggards, the energy, materials and industrials sectors closed the quarter with modestly negative returns. Their declines reflected growing anxiety about future economic growth as those sectors, along with small-cap stocks, are more sensitive to changes in U.S. and global growth.
|
US Equity Indexes |
Q2 Return |
YTD |
|
S&P 500 |
4.28% | 15.29% |
|
DJ Industrial Average |
-1.27% | 4.79% |
|
NASDAQ 100 |
8.05% | 17.47% |
|
S&P MidCap 400 |
-3.45% | 6.17% |
|
Russell 2000 |
-3.28% | 1.73% |
Source: YCharts
Internationally, emerging markets outperformed the S&P 500 in Q2 thanks to optimism towards a rebound in Chinese economic growth and as falling global bond yields late in the quarter boosted the attractiveness of emerging market investments. Foreign developed markets, meanwhile, lagged both emerging markets and the S&P 500 and posted a fractionally negative quarterly return. Concerns about the timing and number of Bank of England and European Central Bank rate cuts, along with French and German political concerns later in the quarter, acted as headwinds for foreign developed equities.
|
International Equity Indexes |
Q2 Return |
YTD |
|
MSCI EAFE TR USD (Foreign Developed) |
-0.06% | 5.75% |
|
MSCI EM TR USD (Emerging Markets) |
5.40% | 7.68% |
|
MSCI ACWI Ex USA TR USD (Foreign Dev & EM) |
1.32% | 6.04% |
Source: YCharts
Commodities saw slight gains in the second quarter thanks to aforementioned optimism on Chinese economic growth and as geopolitical concerns rose throughout the quarter. Gold rallied solidly on the uptick in geopolitical risks, following the tit-for-tat strikes between Israel and Iran, along with the growing chances of a direct Israel/Hezbollah conflict. Oil, meanwhile, logged a small loss on signs of slipping OPEC+ production discipline and concerns about future global growth and demand.
|
Commodity Indexes |
Q2 Return |
YTD |
|
S&P GSCI (Broad-Based Commodities) |
0.65% | 11.08% |
|
S&P GSCI Crude Oil |
-2.7% | 13.68% |
|
GLD Gold Prices |
4.47% | 12.60% |
Source: YCharts/Koyfin.com
Switching to fixed income markets, the leading benchmark for bonds (Bloomberg Barclays US Aggregate Bond Index) realized a slightly positive return for the second quarter, as rising expectations for a September Fed rate cut and moderating U.S. economic growth boosted bonds broadly.
Looking deeper into the fixed income markets, shorter-duration bonds outperformed those with longer durations in the second quarter, as bond investors priced in sooner-than-later Fed rate cuts. Longer-dated bonds, meanwhile, were little changed on the quarter despite the return of disinflation and moderating U.S. economic growth.
Turning to the corporate bond market, lower-quality, but higher-yielding “junk” bonds rose modestly in the second quarter while higher-rated, investment-grade debt logged only a slight decline in Q2. That performance gap reflected continued investor optimism towards corporate profits despite some disappointing economic reports, which led to bond investors taking more risk in exchange for a higher return.
|
US Bond Indexes |
Q2 Return |
YTD |
|
BBgBarc US Agg Bond |
0.07% | -0.71% |
|
BBgBarc US T-Bill 1-3 Mon |
1.34% | 2.68% |
|
ICE US T-Bond 7-10 Year |
-0.05% | -1.40% |
|
BBgBarc US MBS (Mortgage-backed) |
0.07% | -0.98% |
|
BBgBarc Municipal |
-0.02% | -0.40% |
|
BBgBarc US Corporate Invest Grade |
-0.09% | -0.49% |
|
BBgBarc US Corporate High Yield |
1.09% | 2.58% |
Source: YCharts
Third Quarter Market Outlook
Stocks begin the third quarter of 2024 riding a wave of optimism and positive news as inflation is declining in earnest, the Fed may deliver the first rate cut in over four years this September, economic growth remains generally solid and substantial earnings growth from AI-linked tech companies has shown no signs of slowing down.
Those positives and optimism are reflected in the fact that the S&P 500 has made more than 30 new highs so far in 2024 and is trading at levels that, historically speaking, are richly valued. That said, if inflation continues to decline, economic growth stays solid and the Fed delivers on a September cut, absent any other major surprises, it’s reasonable to expect this strong 2024 rally to continue in Q3.
However, while the outlook for stocks is undoubtedly positive right now, market history has shown us that nothing is guaranteed. As such, we must be constantly aware of events that can change the market dynamic, as we do not want to get blindsided by sudden volatility.
To that point, the market does face risks as we start the third quarter. Slowing economic growth, disappointment if the Fed doesn’t cut rates in September, underwhelming Q2 earnings results (out in July), a rebound in inflation and geopolitical surprises (including the looming U.S. elections) are all potential negatives. And, given high levels of investor optimism and current market valuations, any of those events could cause a pullback in markets similar to what was experienced in April (or worse).
While any of those risks (either by themselves or in combination with one another) could result in a drop in stocks or bond prices, the risk of slowing economic growth is perhaps the most substantial threat to this incredible 2024 rally. To that point, for the first time in years, economic data is pointing to a clear loss of economic momentum. So far, the market has welcomed that moderation in growth because it has increased the chances of a September rate cut. However, if growth begins to slow more than expected and concerns about an economic contraction increase, that would be a new, material negative for markets. Because of that risk, we will be monitoring economic data very closely in the coming months.
Bottom line, the outlook for stocks remains positive but that should not be confused with a risk-free environment. There are real risks to this historic rally, and we will continue to monitor them closely in the coming quarter.
To that point, at Cohen & Son Wealth Management of Raymond James, we are committed to helping you effectively navigate this investment environment. Successful investing is a marathon, not a sprint, and even intense volatility is unlikely to alter a diversified approach set up to meet your long-term investment goals.
Therefore, it’s critical for you to stay invested, remain patient, and stick to the plan, as we’ve worked with you to establish a unique, personal allocation target based on your financial position, risk tolerance, and investment timeline.
We remain focused on both opportunities and risks in the markets, and we thank you for your ongoing confidence and trust. Please rest assured that our entire team will remain dedicated to helping you successfully navigate this market environment.
Please do not hesitate to contact us with any questions, comments, or to schedule a portfolio review.
Sincerely,
JONATHAN B. COHEN, AWMA
Managing Director / Branch Manager
Material created by Jon Cohen and Sevens, an independent third party as of July 1st, 2024. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author and not necessarily those of Raymond James. Holding investments for the long term does not insure a profitable outcome. Keep in mind that there is no assurance that any strategy will ultimately be successful or profitable nor protect against a loss. Investing involves risk and investors may incur a profit or a loss.
In your guts you know he’s nuts…. https://www.history.com/news/presidential-campaign-slogans
Make your wet dreams come true https://www.history.com/news/presidential-campaign-slogans
in 1929, the markets collapsed 90% in 3 years! https://www.investopedia.com/timeline-of-stock-market-crashes-5217820
1969 and the markets plummeted 34% https://www.forbes.com/sites/qai/2023/01/06/experts-believe-were-heading-for-a-1969-recessionso-what-happened-back-then/
in 2028, the market suffered a 20% drop https://www.fool.com/investing/stock-market/basics/crashes/#:~:text=9%2C%202007%20%2D%2D%20but%20by,fully%20recover%20from%20the%20crash
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of the total market capitalization of the Russell 3000 Index. The S&P MidCap 400® provides investors with a benchmark for mid-sized companies. The index, which is distinct from the large-cap S&P 500®, measures the performance of mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment. The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 22 developed nations. The MSCI ACWI ex USA Investable Market Index (IMI) captures large, mid and small cap representation across 22 of 23 Developed Markets (DM) countries (excluding the United States) and 24 Emerging Markets (EM) countries. With 6,211 constituents, the index covers approximately 99% of the global equity opportunity set outside the US. The MSCI Emerging Markets is designed to measure equity market performance in 25 emerging market indices. The index's three largest industries are materials, energy, and banks.
The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The Bloomberg Barclays 1-3 Month U.S. Treasury Bill Index includes all publicly issued zero-coupon U.S. Treasury Bills that have a remaining maturity of less than 3 months and more than 1 month, are rated investment grade, and have $250 million or more of outstanding face value. In addition, the securities must be denominated in U.S. dollars and must be fixed rate and non-convertible. The ICE U.S. Treasury 7-10 Year Bond Index is part of a series of indices intended to assess the U.S. Treasury market. The Index is market value weighted and is designed to measure the performance of U.S. dollar-denominated, fixed rate securities with minimum term to maturity greater than seven years and less than or equal to ten years. The ICE U.S. Treasury Bond Index Series has an inception date of December 31, 2015. Index history is available back to December 31, 2004.
The Barclays Capital Municipal Bond is an unmanaged index of all investment grade municipal securities with at least 1 year to maturity. The Bloomberg Barclays US Mortgage-Backed Securities (MBS) Index tracks agency mortgage-backed pass-through securities (both fixed-rate and hybrid ARM) guaranteed by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). The index is constructed by grouping individual TBA-deliverable MBS pools into aggregates or generics based on program, coupon and vintage. The Bloomberg Barclays U.S. Corporate High Yield Bond Index is composed of fixed rate, publicly issued, non-investment grade debt, is unmanaged, with dividends reinvested, and is not available for purchase. The index includes both corporate and non-corporate sectors. The corporate sectors are Industrial, Utility and Finance, which include both U.S. and non-U.S. corporations. The Bloomberg Barclays U.S. A Corporate Bond Index measures the investment-grade, fixed rate, taxable corporate bond market. It includes USD denominated securities publicly issued by US and non-US industrial, utility and financial issuers. Gold is subject to the special risks associated with investing in precious metals, including but not limited to: price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated. The LBMA Gold Price and LBMA Silver Price are the global benchmark prices for unallocated gold and silver delivered in London. SS&P GSCI Crude Oil is an index tracking changes in the spot price for crude oil. Investing in oil involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors.
One cannot invest directly in an index. Past Performance does not guarantee future results. Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification. Investing in oil involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors. Bond prices and yields are subject to change based upon market conditions and availability. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility.
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