Q2 2024 Investments Commentary
John Owens,
CFP®, EA, ECA, CPWA®
MANAGING PARTNER
It was the best of times, it was the worst of times is how Dickens started A Tale of Two Cities - and the first half of 2024 was largely a tale of two markets - one where it was the best of times for big names in the AI space that drove valuations higher for major indices and in particular large US companies - while other asset classes that when combined - make up the bulk of a truly diversified portfolio - saw mixed but generally positive returns.
The quarter ended with most diversified portfolios posting gains overall. On the US stock side, gains were concentrated in Large US companies that are up 15% so far this year - with growth-oriented names like Nvidia helping lead the way.
On the other hand, smaller, more value-oriented companies dropped this quarter and declined 1% year-to-date—a spread of over 16% year-to-date between some of the best and worst-performing US stock styles.
Valuations tell a similar story on the US side - with growth stocks trading at 28x earnings, while value stocks are trading closer to 16x their earnings - often an indicator that the value side of the portfolio continues to have long-term upside.
On the global side of the portfolio, Emerging Markets saw a rally in Q2 - driving year-to-date gains to 8%; while large international stocks were close to flat on the quarter - rising just over 5% this year. Emerging Market returns have quite the divergence as well - with markets like Taiwan, China, and India producing positive returns, while Mexico and Brazil both saw double digit declines year-to-date.
The Real Estate component of the portfolio continues to pay a solid dividend - nearly 4% - but has posted a modest decline year-to-date of 2%. On the bond side of the portfolio, US bonds are down 1% year-to-date, with Municipal bonds down 0.4%. International Bonds are down about 4.7% on the year. The typical diversified portfolio saw gains of about 5% so far this year.
Given that it’s an election year, we’re hearing a ton about the economy from candidates, in the news, and of course in last week’s presidential debate. What’s interesting is that this could also be called both the best and worst of times - and that sentiment is rather evident.
On one hand, we’ve seen record low unemployment and continued job gains. Unemployment is at 4% - which is considered by many economists to be “full employment”, while wage growth in May was at 4.2% - workers have made gains from a tight labor market.
Inflation also continues its steady decline, with May’s headline CPI at 3.3% - a gradual but continuing drop that’s now below the rate at which wages are increasing. All this is to say that inflation has dropped significantly over the past 2-years without tossing the economy into a recession - aka the “soft landing” that many felt was unattainable.
But that doesn’t mean the overall economic outlook is rosy. We’ve actually seen consumer sentiment drop, savings rates decline slightly, and auto and credit card delinquencies slightly tick upward. The reality is that despite inflation declining, many things are pricier than they were a few years ago and that’s hitting folks bottom line. This, coupled with the incredibly tight housing market, has likely been a drag on consumer sentiment.
As we look ahead to the rest of the year, we’ll see if inflation continues to decline, the labor market remains solid, and the US consumer rebounds its confidence. We’ll also keep a close eye on the Fed and any moves they make on the interest rate front.
When I head to the grocery store, I’m often looking for what the best bargain is this week - not because I’m going to realign my entire diet around it - but because it can help guide some of my decisions and meal prep outlook for the future.
The same can be said for looking at various asset classes - what’s on sale, what’s expensive, and which of these are in my diet (portfolio). We can see that US large stocks are on the expensive side - more so today than they were at the start of the year, and about 1-1.5 standard deviations way from their long term average.
Smaller US stocks are more fairly valued, and non-US stocks like DM Equity (developed markets like Europe, Japan, Australia) and Emerging Markets (China, India, South and Central America) are at a bit of a discount. The bond side of the portfolio also shows some upside potential given the current rate environment.
While valuations aren’t the best indicator of short-term returns, they often tell a story about longer-term upside / downside in the portfolio. Thankfully, our allocations are built to incorporate all of these asset classes, and disparities in valuations are just yet another perk of being truly diversified.
