Stolper Perspectives For The Quarter ending June 30, 2024

Category: Uncategorized

This summer is proving to be a scorcher, and the temperature gauge is not the only thing setting records. U.S. equity markets are also bringing the heat, with the S&P 500 notching over 30 record highs in 2024 so far, marking the best first half of the year since 2019, and the best start ever in a presidential election year.

This begs the question of whether markets should now brace for a pullback. But, in the words of legendary investor Peter Lynch: “Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves.” We, also, are advocates for staying the course.

The S&P 500 closed on June 28th at 5,460, representing a strong return of 4.29% for the second quarter and an impressive 15.30% for the first six months of 2024. Despite exhibiting similar patterns in its ups and downs, the Dow Jones Industrial Average (DJIA), which is less technology-heavy, has significantly underperformed compared to the S&P 500. The DJIA ended June at 39,119 for a slightly negative return of -1.27% in the past three months and a more muted 4.79% for the year-to-date.

The S&P 500 achieved its most recent closing all-time high of 5,487 on June 18th having, earlier this year, closed above 5,000 for the first time on February 9th, 2024. The DJIA crossed its milestone of 40,000 close to three months later during trading on May 17th and recorded its latest closing high of 40,004 on the same day. Going into the last week of the quarter, Information Technology has been the clear leading sector so far this year, up 29.9%, with Communication a close behind at a 24.3% gain. Utilities and Financials are next with solid, albeit distant, returns of 11.2% and 10.7%, respectively. With high interest rates still exerting pressure, Real Estate is the only negative sector, down 3.0%, coming into the end of June.

Equities continue to exhibit a relatively narrow participation in market gains, emphasizing the current furor surrounding big name leaders in tech, and notably artificial intelligence (AI). At this time, only 45% of S&P 500 stocks are trading above their 50-day average, down from close to 90% at the start of the year. Some are touting AI as the next Industrial Revolution, and a bipartisan Senate group recently recommended tens of billions of dollars in new federal spending related to AI in the upcoming years.

At their June meeting, the Federal Reserve maintained the benchmark rate steady at 5.25-5.50%. In adding context to the committee’s decision making, Fed Chair, Jerome Powell, referenced the fact that inflation pressures are easing without notable, detrimental economic impact. Emphasizing confidence in current Fed policy, he noted: “We’ve got a good strong labor market. We think we’ve been making progress toward the price stability goal. We’re asking … is our policy stance about right? And we think yes, it’s about right.”

According to the U.S. Bureau of Labor Statistics, the Consumer Price Index (CPI) was unchanged in May, after rising 0.3% in April. The index increased 3.3% year-on-year for May, a drop of almost two-thirds from the June 2022 peak of 9.1%, but still above the Fed’s 2% target. Consumers have seen some relief in prices for staples such as groceries and gasoline, but housing inflation remains stubbornly elevated.

Shelter inflation came in at 5.4% annually in May, slightly below the 5.5% reported for April. Despite rising mortgage rates, house prices in the U.S. are setting record highs. The National Association of Realtors reported that the national median existing-home price was $419,300 in May, up 5.8% from a year earlier. Bidding wars in certain supply-constricted regions continue to be a contributing factor, together with a relative rise in the number of sales of high-price homes. New home sales, which account for about 10% of the market, unexpectedly plunged 11.3% from April to May in the steepest decline since September 2022. Home builders face the same elevated interest rate environment as buyers, as well as rising construction and labor costs.

In opposition to shelter prices, U.S. gasoline prices fell 3.6% in the month from April to May. WTI crude began the quarter around $85/barrel, but had dipped below $75/barrel by the beginning of June. It has since recovered to above $80/barrel, although gains are being stymied by a stronger dollar and a surprise build in U.S. inventories, bucking the traditional summer dip expectation. Persistent geopolitical tensions—notably Ukrainian attacks on Russian refineries and Israeli strikes on Gaza—continue to add a risk premium to oil prices. Still, when plotted against the S&P 500, energy sits around 3.5x times below its cycle high.

The Bloomberg US Treasury Index has staged a rally in the past two months, bringing it close to flat for the year-to-date, after being down over 3% in late April. Since late May, the sharp rise in bond prices has pushed down the yield on the 10-year U.S. Treasury note by 0.33%, resulting in a current yield of 4.3%. The drop is perhaps a signal that the market’s expectations of incoming rate cuts are in opposition to the Fed’s more cautious tone. Dropping bond yields is also playing into the stock market rally. In contrast, The S&P 500 fell 4.2% in April, after concerns over stubborn inflation helped propel the 10-year yield above 4.5%.

Lower bond yields help public and private borrowers alike. Even minor changes are of heightened importance in the face of figures coming out of the Congressional Budget Office (CBO). The CBO is now projecting that the fiscal budget deficit for 2024 will come in at $1.9 trillion, $400 billion higher than its February projections, and $300 billion larger than last year’s deficit.

Savers sit on the opposite side of rate beneficiaries. According to the Investment Company Institute, assets in money-market funds hit a record $6.12 trillion earlier this month, as funds have poured into cash-like investments. If rates have peaked, investors will have to decide between accepting shrinking interest payments or taking a more risk-on approach with other assets, including stocks.
In the last week of June, the Federal Reserve announced that all 31 banking entities subject to testing passed their annual stress test and could withstand a severe recession scenario. Although good news, a recent Federal Deposit Insurance Corporation (FDIC) report highlighted that the U.S. banking system has 63 “problem banks” and collectively recorded unrealized losses of $517 billion for the first quarter of 2024, a $39 billion increase from the previous quarter. These losses have ballooned as held-to-maturity bonds on banks’ balance sheets lose value in a rising interest rate environment.

Elsewhere, rate cutting has already begun. The Bank of Canada cut interest rates for the first time in four years this month, from 5% to 4.75%, becoming the first G7 country to do so. However, following the cut, figures showed that the Canadian annual inflation rate accelerated to 2.9% in May from 2.7% a month prior. Following suit, on June 6th The European Central Bank (ECB) delivered its promised first interest rate cut since 2019 despite an uncertain inflation outlook. The ECB’s key rate is now 3.75%, down from a record 4% where it has been since September 2023.

It is a different picture over in the U.K., where the Bank of England voted in late June to keep its rate at a 16-year high of 5.25% despite inflation falling to its target of 2%. Policymakers warned that a premature cut could reignite price pressures. The decision may have disappointed the governing Conservative Party and its Prime Minister, Rishi Sunak, who called a snap general election for July 4th. Housing affordability, coupled with the general cost-of-living crisis, are hot buttons in a matchup that is widely expected to deal the Conservatives, or ‘Tories’, a devastating wipeout.

Here in the U.S., we are already in full election mode as voters, with varying levels of enthusiasm, get ready for a close match between Biden and Trump in the November presidential sequel race. If the tickets remain the same, it will be the first rematch since 1956, when Republican President Dwight D. Eisenhower again defeated Adlai Stevenson, his Democratic opponent, from four years prior.

Donald Trump, convicted by a Manhattan Jury in May on all 34 counts of falsifying records to keep an extramarital scandal quiet that could have threatened his 2016 White House bid, entered his first debate with Joe Biden on June 27th as the first American president to be declared a felon. The substance of the candidates’ replies was crafted to appeal to party loyalists on each side. Predictable debate topics included border control, taxation, inflation, Roe V. Wade, foreign policy, and events of January 6th, 2021. It also veered into strange territory at times, including golf handicaps, and both candidates did not pass all fact checks.

But by far the biggest talking point, post-debate, was President Biden’s unsteady performance. While Vice President Kamala Harris immediately went on air to defend her boss’ showing, urging voters to focus on substance and not Mr. Biden’s ‘slow start’, other prominent Democrat voices, including usually loyal media figures, are calling for him to be replaced as the party’s candidate. What, if anything, changes is to be determined.

Naturally, investors focus on how the election outcome will affect the economy and financial markets, and as campaigns and rhetoric reach their peak, we can expect heightened volatility. Regardless of the outcome, however, while leadership and politics steer high-level budgeting, taxation and spending policies, the health of the underlying economy is determined by multifaceted forces.

Inflation, Fed policy, earnings growth, risk appetite, and valuation metrics have proved more reliable market indicators than who controls the White House or congress. According to research by Larry Adam, Raymond James Chief Investment Officer, under Democrats, the S&P 500 generated an annualized performance of 10.1% versus 8.1% under Republicans. In either case, the message is the same—it pays to stay in the markets over the long term!

We’ll take the sweltering summer highs alongside the market highs as we hope you are keeping cool, and trust that those steering the country and important policies are keeping cool heads. As always, we thank you for the continued confidence you show in us as your trust financial advisor.

The S&P 500 is an unmanaged index of 500 widely held companies and over 80% of the U.S. equities market.  The Dow Jones Industrial Average (DJIA), commonly known as “The Dow”, is an index representing 30 companies maintained and reviewed by the editors of the Wall Street Journal.  The information contained in this report does not purport to be a complete description of the securities, markets or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of the investment adviser representatives of Stolper Asset Management and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice.  Investing involves risk and you can lose principal.  There is no assurance any strategy will be successful.  There is no guarantee that any forecasts made will come to pass.  Past performance may not be indicative of future results.  This information is not intended as a solicitation or an offer to buy or sell any security referred to herein.  Dividends are not guaranteed and must be authorized by the company’s board of directors.

 

 

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