Q2 2024 Market Update

Q2 2024 Market Update

The second half of 2024 is underway with the equity markets continuing their upward trajectory in the second quarter. Year-to-date, the All-Country World Index (ACWI) is up 10.45%, while the Aggregate Bond market has declined by -1.19%*.

*Folio Institutional Data

Economic Update – Slowing Down?

There are signs that US economic growth is slowing down. Jobless claims have averaged 235,000 per week over the last four weeks as of 7/22, compared to 211,000 in the first quarter. This consistent increase in claims is pushing unemployment higher.

Retail sales have increased by only 0.2% over the past six months, which is well below the pace of inflation, signaling that consumers are starting to pull back.

While the US is not in a recession yet, higher unemployment is beginning to lead to reduced consumer consumption. The lack of artificial stimulus, combined with a return to more normal post-pandemic consumption behavior, seems to point towards a real slowdown.

As this unfolds, we expect the Federal Reserve to respond with interest rate cuts during the second half of this year. The economy’s trajectory is uncertain. Remember, during COVID-19, the economy was bolstered by capital infusions to offset the impact of global shutdowns. This created a volatile cycle from 2020 to 2023 with rolling industry-specific recessions and significant inflation due to the influx of ‘unearned money’. Now, as this infusion has ended, inflation has tempered, although prices are unlikely to deflate. Instead, we should see a return to a more typical annual price increase of 2-3%.

In summary: Consumers and institutions became flush with cash from COVID-19 stimulus measures. That cash is now gone, leading to inflation from excess stimulus. Wages did not keep pace since the stimulus was unearned. As a result, consumers will eventually be pinched and start to spend less.

This all points to less cash for consumers to spend going forward and lower economic growth. This data is now appearing in GDP reports, and it will be interesting to see if the slowdown is sufficient to cause a recession or if the Federal Reserve and the economy can navigate a path back to normalcy.

Opportunities Outside Large Cap?

As investors, the equity markets have been rewarded with solid gains to help portfolios keep up with inflation. It is normal to see outsize gains for a period followed by some declines as the economy cools off. As stewards of your capital we are well aware of the potential economic cycle and of course, are preparing in advance in accordance with your plan and risk tolerance. Our main actions continue to be trimming profits, and building some safety such as money markets or added bond exposure while leaning into diversification and new opportunities that arise. We are working hard to lean into this balance for all accounts. To this extent we see some opportunity brewing.

Under the surface, the market is showing some unique cross-currents, with equity strength expanding beyond Big Tech, which is a welcome and healthy sign. Changes in the economic cycle often unlock new opportunities. Since the quarter ended, we have seen small caps outpace large caps by over 10% in less than a month. We do not think this is just a coincidence but rather a direct tie to inflation normalizing.

Larger companies can often push through price increases more easily than smaller ones due to their significant market presence and customer loyalty. In contrast, small businesses, which are more price-sensitive and have more competition, struggle during inflationary cycles. As the economic tide changes back toward more normal inflation, we may see a resurgence in small caps, highlighting the importance of diversification in portfolios.

We are actively looking to lean into some of this changing dynamic as inflation settles down. We are very pleased to see new currents appearing under the surface and often find our next leg up for investing comes during times of change or troubles. Opportunity is brewing!

What Really Matters

“In the short run, the market is a voting machine, but in the long run, it is a weighing machine.” – Benjamin Graham

In the short term, the market reflects the sentiments of people at a given time. It is influenced by the complex situations, emotional mindsets, fears, greed, emergencies, wars, and other factors affecting individuals and groups. These factors can lead to irrational and unpredictable stock price movements.

As investors, it’s crucial to recognize what we can and cannot control. We cannot control the economy, and even if we could make reasonable predictions from economic indicators, predicting the exact timing, depth, or duration of market declines is nearly impossible. Investing accurately requires precise timing, which is beyond our control due to numerous variables. Attempting to time the market based on short-term economic inputs is a game we choose not to play.

However, when we shift our focus from short-term emotions and data to long-term trends, our odds of success increase significantly. The market transitions from a voting machine to a weighing machine. Predicting a reasonable return of 7-9% over the next 3-5 years is challenging due to uncertainties like Federal Reserve actions, global trade, geopolitical issues, and policy changes. These endless questions make short-term predictions unreliable.

Expanding our investment horizon to 10, 20, or 30 years aligns us with a higher probability of success. If GDP continues to grow with inflation, supporting corporate growth and cash flows, the power of compounding becomes evident. Despite interruptions, given enough time, the probability of achieving sustainable returns increases, helping to meet your financial goals.

By focusing on cash flows from solid businesses, seizing opportunities, staying diversified, and planning for the long term, we significantly enhance the probability of success. Over the past 20 years (from 7/1/2004 to 7/1/2024), the S&P 500 gained 618%, and the US Aggregate Bond market gained 84%. By doing very little and letting time work its magic, significant wealth could be accumulated at various risk levels. This period included the Great Financial Crisis, wars, geopolitical strife, and technological advancements, yet the markets found a way to grow over time.

“The stock market is a device to transfer money from the impatient to the patient” – Warren Buffet

Conclusion

Mr. Market remains optimistic about the future of earnings, Fed actions, and liquidity. As investors, we aim to balance optimism with caution. Despite elevated risks, opportunities exist. Declines are a normal part of long-term investing, and often the best action is to remain patient and let time work its magic. We seek to take money from the impatient investors as we wait for the power of time and long term compounding to work its magic.

Our keys to success include maintaining a long-term focus while taking advantage of shorter-term opportunities. We remain committed to real business values and aim to maintain a healthy portfolio that aligns with your long-term financial plan.

Thank you for your continued trust. Our success is due to a great team, great advisors, and great clients. It is an honor to steward your assets and help you meet your objectives. Please reach out with any questions or concerns.

Disclosures

(1)        *Data reported by custodian Goldman Folio Institutional.
(2)        **Data provided by Y-Charts reporting 

Index and index ETF results such as the All-Country World Index (ACWI) or Barclays Aggregate Bond Index (AGG), or S&P 500 (SPY) do not reflect management fees and expenses and you cannot typically invest in an index but may be able to invest into a similar ETF that reflects the index for a small fee.

Evergreen Wealth Management, LLC is a registered investment adviser.  The information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

The opinions expressed herein are those of the firm and are subject to change without notice. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Any opinions, projections, or forward-looking statements expressed herein are solely those of author, may differ from the views or opinions expressed by other areas of the firm, and are only for general informational purposes as of the date indicated.