Summer greetings from Integrity. We hope you are doing well and enjoying all of the activities that this time of year brings. One of the early summer activities for Integrity is the annual Integrity Charitable Golf Tournament. It was an extremely successful event this year as over $60,000 was raised for Brad’s House (www.BradsHouse.net), an organization that empowers young men aged 8-21 who have faced hardships. A special thanks to all of you who played and those of you who supported the tournament through sponsorships. Our company is fortunate to have a large volunteer team who work very hard to make this happen every year led by Larry Dozier, Jaime Gibson and Sydnei Shaw. The event is one example of our pursuit of fulfilling our mission statement “to have an enduring impact on the community”.
You probably recognize the title of this quarterly commentary as part of the famous line from the movie Forrest Gump, “Life is like a box of chocolates. You never know what you’re gonna get”. Doesn’t the first half of 2024 feel a bit like that after struggling with stubborn inflation and persistently high interest rates, and yet still experiencing strong returns in the global stock markets? The total return for the S&P 500 (US Large companies) was 15.3%, the Nasdaq (US Technology companies) 18.6%, and the Dow Jones Industrial Average 4.8%. International stocks also performed well with returns of 5.7% for developed markets and 7.7% for emerging markets.
The 10-year Treasury yield declined from its April peak of 4.7% to 4.4%, allowing the investment-grade bond market to be roughly flat on the year and high yield bonds to continue their solid returns.
The strong market performance has caught some investors off-guard. After years of very low (too low) interest rates, the opportunity to earn 5%+ on cash has caused many to forgo the stock and bond markets for safer (less volatile) investments including money markets. There has been an opportunity cost to that strategy. The New Oxford American Dictionary defines opportunity cost as “the loss of potential gain from other alternatives when one alternative is chosen”. Our highest-yielding money market crossed the 5% yield threshold in late March 2023. The table below reflects the total returns of that money market versus various major asset classes from April 1, 2023 through June 30, 2024.
Asset Class Total Returns
April 2023 Thru June 2024
Asset Class | Annualized Return |
Money Market | 5.3% |
US Large Companies | 27.6% |
US Small Companies | 12.5% |
International Developed Companies | 20.5% |
US Investment-Grade Bonds | 1.4% |
US High Yield Bonds | 7.9% |
Each investor’s situation is different. Using a money market to hold cash earmarked for planned and emergency spending is a proper strategy in our opinion. However, as defined by opportunity cost, using a money market for assets earmarked for long-term investing has been a harmful strategy over this particular time frame.
Four points to keep in mind as we move into the second half of the year:
- Should we adjust portfolios based on the upcoming election?
We encourage everyone to vote their values as elections are important in allowing voters to shape the direction of our country. Should we try to adjust our portfolios based on potential outcomes?
See the chart below. While this election cycle may cause some volatility in the short-run, history has shown that the investment markets can do well over time regardless of the party in control of the White House. Elected officials will certainly impact tax rates, trade, regulations, etc, but the changes tend to be gradual and their ultimate impact can be overestimated.
- Inflation appears to be cooling, meaning the Federal Reserve (“Fed”) may cut rates later this year
The following chart shows a possible path for the Federal Funds rate based on the Fed’s latest projections. The Fed has been hesitant, and rightfully so, to declare that the battle against inflation has been won and therefore lower rates are appropriate. Fortunately, the May inflation data reflected a deceleration that may lead to rate cuts later this year, possibly starting in September.
- A clearer path for interest rates supports the bond market
After years of low (again, too low in our opinion) interest rates, the last few years of much higher rates have been painful for new borrowers and many bond owners (those who owned bonds before the rate hikes began). After higher-than-expected inflation readings in the first quarter of this year, the latest Consumer Price Index (CPI) data showed no change in overall prices in May for the first time in almost two years. “Core” CPI rose 0.2% in May, or 3.4% year-over-year, a healthy deceleration from the previous month’s 3.6% pace. Other data, such as the Personal Consumption Expenditures index that the Fed favors, and the Producer Price Index, have shown similar patterns.
These developments, along with new Fed guidance, have pushed rates lower in recent days, supporting bond prices. The Bloomberg U.S. Aggregate Bond Index, a measure of the overall U.S. bond market, as referenced above is nearly flat on the year after declining as much as 4% in April. This is in sharp contrast to 2022 when bonds fell into a bear market during the historic jump in interest rates, before stabilizing and rebounding in 2023.
- The markets continue to reach new all-time highs. Does that mean there should be a correction?
The S&P 500 attained over 30 new all-time highs in the first half of 2024 as it returned 15.3%. While this is positive, it can make some investors nervous as the logical thought is that we are therefore due for a correction. Is it actually true that attaining new highs should automatically lead to pullbacks? Three points from Invesco:
- Stock market returns do not revert to a long-term average. Rather, they represent growth expectations. If companies in general continue to be profitable and grow their earnings, then we shouldn’t be surprised when the markets continue their long-term upward trend.
- New highs provide very little information in and of themselves. It is much more important to analyze prices versus the underlying fundamentals (e.g. earnings, sales, book value).
- Since its inception, the S&P 500 index has attained a new high on average every 14 days. History suggests that investors will experience many new highs in their lifetime, even if the path isn’t always a straight one.
Price swings are a normal part of the investing experience and the market will certainly pull back at some point. However, the timing of declines is impossible to predict. Major stock market indices will naturally spend a significant amount of time near record levels during bull markets, as shown in the chart above. Trying to time the market to take advantage of price swings will almost always lead to negative results. A long-term approach to investing allows you to take advantage of whatever the markets bring. A short-term approach to investing (aka “market timing”) doesn’t work. See comments on opportunity cost above.
This year, artificial intelligence stocks – particularly Nvidia – have contributed greatly to market returns with the Information Technology and Communication Services sectors gaining 28.2% and 26.7%, respectively, through June 30th. Other sectors, however, have more recently begun to benefit as well with Energy, Financials, Utilities, and Consumer Staples all experiencing rallies of around 10%. All told, 10 of the 11 sectors are positive on the year. It’s unclear where large-cap technology stocks may go from here, but staying diversified across all asset classes should provide investors with better risk-adjusted returns over long periods of time.
Much like the character Forrest Gump experienced multiple times in the above-referenced movie, it seems that we may be living in one of those unique periods in history right now that many of us will never forget. Recalling the points above may be helpful as we experience what could be a bumpy second half of the year. Remember to focus on the long-term and be sure to take a minute to be thankful for the good returns from the first half of 2024.
To our clients, thank you for allowing us to invest our energies into your financial lives. To everyone, thank you for taking the time to read our quarterly commentary and let us know if there is anything we can do.
Enjoy the rest of summer