VWG Wealth Management 2024 2nd Quarter Review

By VWG Wealth Management on July 19, 2024

Executive Summary

• U.S. stocks continued their advance in the 2nd quarter. Contributors included solid corporate profits, anticipation that peak interest rates had been reached for this cycle, and intent focus on the prospects for artificial intelligence.  The S&P 500 Index gained 4.3% and is now up 15.2% this year.  U.S. small stocks and international stocks in developed markets edged lower.
• The U.S. economy showed signs of slowing but remained firm. Inflation cooled.  Strains caused by very restrictive Federal Reserve monetary policy – in employment, corporate profits, and economic health – have failed to materialize.
• Bond yields finished the quarter little changed. The yield of the 10-year U.S. Treasury note finished at 4.37%.  The inversion in the 2yr vs 10yr U.S. Treasury yield curve steepened.  The current curve inversion is now the longest in history.
• VWG is constructive on the current investment landscape, despite geopolitical tensions, global political uncertainty, and rising asset valuations in some market subsectors. Our portfolios seeking long-term capital appreciation are diversified and moderately positioned.  We are cognizant that market conditions have been benign and quite favorable over the past 19 months, and we expect that periodic bouts of volatility will inevitably emerge.
• The forthcoming 2024 U.S. election season poses to be calamitous and disorienting. The differences between the candidates, their proposed policies, their supporters, and the political parties are extremely wide.  We anticipate having conversations with many concerned clients as the election process proceeds.
• VWG emphasizes that financial planning should always be the primary driver of portfolio positioning and investment decisions. Investors should always “play their own game,” and not be swayed by markets, media, and political noise.
• As long-term investors, we recommend maintaining perspective and a positive attitude. Owning quality, dominant businesses, and employing strategies and managers that do the same, has historically proven to be a keystone strategy in helping individuals navigate through choppy waters.

Review of the Markets

Large U.S. stocks continued their advance in the 2nd quarter, albeit at a slower pace than it posted in the 1st quarter.  The S&P 500 index rose 4.3% and has returned 15.2% year to date.  Contributing to the rise were solid corporate profits, continuing economic and employment stability, anticipation that peak interest rates in this cycle had been reached, and intent focus on the prospects for generative artificial intelligence (AI).  Market volatility fell to levels last seen before the pandemic.  Things were not as calm underneath the surface, as more money moved into an increasingly narrow group of stocks, primarily technology and semiconductors.  The average stock dropped in price, and many industry sectors faltered.  Piper Sandler’s chief market technician commented, “a F.O.M.O. (fear of missing out) rally is underway, as a combination of narrowing leadership and market breadth is forcing momentum investors into a select group of stocks.”

Small U.S. stocks continued to underperform larger stocks.  The Russell 2000 index fell 3.2% in the quarter and is positive 1.6% this year.  The widening discrepancy in returns between small and large stocks has been notable.  Strategas Research Partners points out that “there are really only two past periods that compare to the current underperformance (of small stocks) – the height of the dot-com bubble and the depths of the COVID economic lockdowns.”

International stocks slipped the quarter after France’s President Emmanuel Macon’s surprise move of calling for snap parliamentary elections, made in response to rising populism and his waning power.  Concerns are increasing over France’s economic trajectory and its future role within the European Union.  The MSCI EAFE index slipped 0.2% but has risen 5.8% this year.  Emerging markets stocks fared a little better.  The MSCI Emerging Markets Index gained 4.4%.  It has increased 6.6% this year.

The U.S. economy showed some signs of slowing but remains firm.  Housing starts, building permits, and retail sales softened during the 2nd quarter.  Employment cooled from very strong levels but is still solid in most regions of the country.  May’s Department of Labor jobs report showed an increase of 272,000 jobs added.  DOL’s press release stated that “the rate of unemployment has been at or below 4% for the past 30 months, the longest stretch since 1970.  The labor force participation rate for prime-age women once again set a record high at 78.1%.”

Economic resilience, and sticky but declining inflation readings, led to stable interest rates during the quarter.  Expectations for federal funds rate cuts have decreased from six at year’s start down to one or two.  The yield of the 10-year U.S. Treasury note finished the quarter at 4.37%.  The Bloomberg U.S. Bond Aggregate Index was flat for the quarter and has declined 0.7% this year.  With monetary conditions remaining constrictive, and with expectations of the Fed to move more slowly, the 2-10 year U.S. Treasury yield curve moved more deeply into inversion.  This yield curve inversion is now the longest period in history.  Many strategists and market historians see this as a warning sign that could point to further economic weakening.

Copper and gold were noteworthy commodity standouts in the 2nd quarter.  Gold continued its push through record highs.  The NYMEX Gold continuous futures contract increased 4.3% and has appreciated 12.9% this year.  Reflecting an improving global economy, supply shortages, and anticipating growing demand from the clean energy transition, copper hit an all-time high.  The NYMEX High Grade Copper continuous futures contract rose 8.7%.  It is up 12.9% this year.

VWG’s Current Stance on Capital Markets

Despite geopolitical tensions, political uncertainty, ballooning levels of sovereign debt, and rising asset valuations in some market subsectors, VWG is still positive.  Reshoring, technological disruption, large language models (LLM) all offer great promise.  Economic growth and corporate earnings are all performing better than consensus.  Unemployment has remained low, inventories are stable, housing activity appears to be stabilizing.  The AI capital expenditure boom holds the promise of planting seeds for increases in productivity and corporate profitability which could be significant.  The economy and corporations have endured and prospered through an astounding rise in inflation and accompanying increase in interest rates.  We are cognizant that many risks are also present, and that markets have been in a “goldilocks” period since the October 2022 lows.  However, opportunities are present and are being created for long-term patient investors.  Our recommended portfolios are diversified and have adequate levels of cash and liquid short-term bonds, which could be a source of security or opportunity when volatility inevitably returns.  Now is not the time to take excess risk, add leverage, or chase short-term returns.

Anticipating the 2024 U.S. Election

VWG almost always declines to comment directly on politics or elections.  However, this year’s U.S. presidential election will assuredly elicit numerous client questions, concerns and reactions.  It is still early July, the first debate has just been held, and the party conventions are weeks away. Yet many political strategists and observers expect this to be one of the most contentious and volatile elections held in our country in the past 100 years.

The 2024 presidential election will be unique in many ways.  This is the first rematch of a presidential election since 1956.  There has only been one time in history that a president served two non-consecutive terms (Grover Cleveland).  As such, most of what America understands and perceives about these candidates should be generally well-known by the consensus.  But America has become further polarized over the past 4 and 8 years since Presidents Biden and Trump took office.  The differences between the two are extremely wide, and there are many uncertainties over what policies, actions and stances either would take if placed in office. 

Andy Laperriere, Piper Sandler’s head of U.S. policy, observes that “unlike any recent election, some of the biggest issues for investors are macro in nature:  heightened geopolitical risk and instability, an unsustainable fiscal policy, and potential swings related to trade, taxes, regulation and immigration.” 

Related to trade, Dan Clifton, Strategas’ head of policy research sees the election as a “referendum on the speed at which deglobalization will take place, with Trump accelerating the pace.”  On taxation, he believes that “2025 could be the most significant single year for tax policy since the 1913 creation of the federal income tax.  The winners of the election, both in the White House and Congress, will have an outsized effect on how taxes will be handled next year.”  Roughly $4 trillion in expiring tax provisions are on the table, including the expiring individual tax provision from 2017’s Tax Cuts and Jobs Act.  The elephant in the ‘tax policy’ room is the current net interest cost on the ballooning U.S. federal debt which now stands at 17% of tax revenue and is climbing.

Laperriere summarizes this complex stew between the candidates, the parties, and their constituents: “There are significant concerns over both Biden’s and Trump’s abilities to serve as president.  Both are a threat to the rule of law, and each has their legal and ethical problems.  Both have radicalized their own party and the opposition.  Each is viewed as illegitimate by half the county.  Each is widely unpopular.”  Clifton states more succinctly, “the forthcoming political season will be perhaps as wild and toxic as we’ve seen in decades.”

In the face of such polarity, expected contentiousness, and the media circus that is certain to accompany, what should investors do? 

VWG’s Guidance Heading into the 3rd Quarter and the Presidential Election

“Investing isn’t about beating others at their game.

  It’s about controlling yourself at your own game.”

– Benjamin Graham, “The Intelligent Investor”

As we enter a potentially calamitous and disorienting election season, VWG continues to prioritize our client’s financial goals.  To firmly ground and guide this effort, we advise the following: 

• First and foremost, planning to define financial goals and set strategies to achieve them should drive individual decisions and portfolio positioning. Clients should maintain diversified portfolios in the face of uncertainty.  The plan should be regularly reviewed and updated if necessary.  Individuals should always “play their own game,” driven by their own specific planning and behavioral makeup.  Don’t be swayed by the markets, the financial media and the short-term actions of others.  
• Try your best to avoid or minimize your attention to the expected flood of political diatribe and media noise. In a tightly contested election, many players are highly incentivized to unsettle emotions and create confusion.  Don’t expect them to ‘play fair’ or act in your best interests.
• Looking through a wider lens, history has proven elections to be benign to markets. S. stocks have been positive in most election years, particularly in which the incumbent president was running for re-election.

Chart courtesy of Strategas Research Partners, May 2024

• Maintain perspective. RBC’s head of equity strategist Lori Calvasina explains that “if you take a step back, U.S. stocks tend to rise long-term under any combination of political leadership.”  Her analysts do not project any profound impacts to businesses in their respective industries under widely varying election scenarios.  Many proposed policy changes and enactments of laws by an incoming administration will take 12-18 months to put into place, and even longer to filter out into the economy and corporate financials.
• Do not underestimate the policies and actions by the Federal Reserve. In a recent Bloomberg Television interview, famed economist Ed Hyman (Evercore ISI) was asked about the possible impacts of the election.  He responded, “my north star is always monetary policy, and monetary tightening is the currently the dominant force.”
• Own quality businesses, and employ strategies featuring the same, possessing protective moats, superior business models, operated by experienced, visionary operators. Be comforted by their ability to be flexible and able to adapt to rapidly changing conditions.  As example, we need to look no further than to review the remarkable navigation and execution of dominant U.S. businesses through the unprecedented challenges of the COVID crisis, and the subsequent sharp spike in inflation and interest rates.
• Allocate capital to quality managers who do the same, keeping a long-term focus.  As Polen Capital, one of our favored U.S. equity managers, explained it during a recent conference, “we are not in the business of predicting rain, we are in the business of building the ark.”  Do not attempt to predict or time political outcomes, or the effects of policies a new administration may put in place.  Do not attempt to predict or time markets, or their reactions of markets to these outcomes.  Be reminded to “play your own game,” which for most of us is highly individual, and is focused on the long-term.
• Maintain a positive attitude fostered by long-term optimism. As Warren Buffett advised concerned shareholders at the onset of the 2016 election cycle: “For 240 years it’s been a terrible mistake to bet against America, and now is not time to start.  America’s golden goose of commerce and innovation will continue to lay more and larger eggs. . .   The babies being born in America today are the luckiest crop in history.”

With all of this in mind, here’s hoping that we get a few lapses in the political noise between now and fall to allow all to enjoy a wonderful, fun-filled summer!  Have fun!

Regards,

VWG Wealth Management

Suzanne, Ashley, Rashmi, Kay, Brandi, Lynette, Michelle, Mary Kate, Lilly, Ryan, Ryan, Ryan, Justin, Elana, John, Rick and Jeff

* All stated index returns are as of 6/28/2024 unless otherwise indicated.

* Index Data and Charts Sourced from FactSet Research, Morningstar, Bloomberg and Strategas Research Partners.