May 2024 Monthly Commentary
Guess what? The boxing world is about to witness a showdown of epic proportions! Rocky Balboa, the legendary "Italian Stallion" from the mean streets of Philadelphia, is stepping back into the ring. And his opponent? None other than the ferocious "Raging Bull" Jake LaMotta, straight outta the Bronx. It's like a clash of titans, my friends! How did this unexpected matchup come to be you ask? Well, it all started with some Hollywood drama. Robert De Niro, who played Jake LaMotta in a movie, made some controversial remarks about Sylvester Stallone's pal, Donald J. Trump, and his escapades with a film star. Who would've thought that a boxing match could be born out of such spicy gossip? But hey, this is a financial newsletter, not a tabloid, so let's shift our focus to what really matters – the driving forces behind the US economy and where we're headed.
The S&P’s 500 near 4% gain last month marked its best May since 2009. An interesting feat against the popular Wall Street adage, "sell in May and go away." Now, let's dig deeper into the factors that have been influencing the economy, including inflation, jobs data, and statements from the Federal Reserve. The latest Consumer Price Index (CPI) report, released on May 15th, revealed that inflation rose 3.4% in April compared to the previous year. To grasp the significance of this number, let's take a brief stroll down memory lane.
When the Coronavirus outbreak hit, the Federal Reserve pulled out all stops to protect the economy. They slashed interest rates to zero and unleashed a massive $700 billion quantitative easing program. And while those actions were necessary at the time, the Fed now admits that they kept interest rates too low for too long. As a result, inflation peaked at a staggering 9.1% – a level we hadn't seen in over 40 years. Yikes! To tackle this inflation genie, the Fed went on a mission to raise interest rates, increasing them 11 times to reach a range of 5.25%-5.50%. Although we are now seeing signs of a cooling economy (unemployment ticked up to 3.9% in April from 3.8% in May), inflation still remains sticky at 3.4%, well above the Fed's 2% target. So, while the Fed does have plans to cut interest rates this year, they have yet to provide us with a clear indication of when that will happen. Jerome Powell, head of Federal Open Market Committee (FOMC), insists that "looking ahead, we will continue to take a data-dependent approach".
What does all this mean for investors? While the stock market continues its rally, reaching new all-time highs, it's crucial to remember that a well-balanced portfolio should consist of a variety of asset classes. It's not all about chasing after the flashy, high-flying stocks (did someone mention Nvidia?). No, my friends, a truly successful portfolio includes income-producing investments across different asset classes. In this current higher-interest rate environment, there are some enticing yields available across a wide range of asset classes for all you income-hungry investors out there. So, let's take a break from the glitz and glam of the equity market and shine a spotlight on a few opportunities in income-producing investments.
Short-term fixed-income accounts and securities, including money markets, treasuries, and one to five-year bonds, are currently offering yields around 5%. Investors with a need to meet short-term liabilities or simply have funds earmarked for emergency reserve may tend to want to play it safe with over-night money-markets. On the other hand, the landscape for short-term accounts and securities will likely change once the Fed starts cutting rates. In that case, one to five-year bonds could be the way to go, securing today's yields for a longer period of time.
Next up, we have Investment Grade Bonds, which include bonds issued by corporations, the U.S. Treasury, and Government Agencies. These bonds are currently yielding approximately 5-7%. They offer a steady stream of income without those heart-stopping price fluctuations you often see with stocks. Plus, they provide diversification for your portfolio, as they don't dance too closely with the stock market. Some may argue that the slightly higher yields compared to Treasuries might not be worth the additional credit risk. But hey, if the market takes off and rates start to drop, you might find yourself kicking yourself for not locking in those higher yields. And let's not forget, Investment Grade Bonds are generally less risky than stocks. It's like choosing a reliable sparring partner instead of stepping into the ring with an unpredictable opponent.
Finally, we have Municipal Bonds, issued by state and local governments. Munis are currently yielding around 4-7%. The great thing about Municipal Bonds is that they come with minimal credit risk since most state and local governments have a solid financial standing. And here's a bonus – the interest you earn from Municipal Bonds is free from federal taxes. And if you're lucky enough to be holding bonds issued in your state of residence, you can also enjoy freedom from state and local taxes. Talk about a knockout deal for investors in higher tax brackets! One potential downside to Municipal Bonds is their high valuations. It's like they're the popular kids in school, and everyone wants a piece of them. But hey, popularity can come at a price.
We've made it through another eventful month, folks. As we enter June, let's stay positive and remember, just like a boxing match, the market will have its ups and downs. But fear not! With a well-diversified portfolio, and a keen eye, we can continue to find opportunities.
Wishing you a belated Happy Memorial Day and a joyful summer ahead!
Onwards and upwards, always! Steven and Daniel
Any opinions are those of Steven Schmitt and Daniel Mar and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. The information contained in this commentary does not purport to be a complete description of the securities, markets, or developments referred to in this material. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including asset allocation and diversification. Past performance does not guarantee future results.
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise. Investments in municipal securities may not be appropriate for all investors, particularly those who do not stand to benefit from the tax status of the investment. Municipal bond interest is not subject to federal income tax but may be subject to AMT, state or local taxes.U.S. government bonds and Treasury bills are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S. government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Treasury bills are certificates reflecting short-term (less than one year) obligations of the U.S. government.
