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The second quarter of 2024 continued to show strength, with the S&P 500 Index gaining over 4% and up an impressive 15.5% for the six months ending June 30 (Source: Morningstar). As was the case last quarter, a majority of the performance was led by a small group of technology stocks.
Although we’re beginning to see more signs of economic growth slowing, and as many Americans now have more debt than savings, consumers continue to spend on travel. TSA traffic so far in 2024 has outpaced prior years, including 2019 through 2023 (Source: Department of Homeland Security).
The June 2024 jobs report, while adding 206,000 jobs, showed 34% were government-sponsored, and only 136,000 were within the private sector. An important revelation is that the unemployment rate reached 4.1%, the highest since November 2021, with 800,000 more unemployed than one year ago (Source: Bureau of Labor Statistics). The economy seemingly avoided a recession with a registered 1.4% GDP growth in Q1, and GDP estimates for the second quarter were revised down to 2.2% (Source: Atlanta Fed).
Thus far, the Federal Reserve has left interest rates unchanged, and inflation has fallen dramatically from 9.1% in 2022, cooling to 3.1% in June (Source: Morningstar). Though there are rumblings of a possible 0.5% interest rate cut later this year, the Fed has said it is awaiting more confidence that price pressures are easing toward its target before it begins to cut rates and loosen monetary policy. Regarding the housing market, interest rates have largely kept many Americans tethered to current homes, others with cash on hand to buy, and hopeful homeowners awaiting future opportunities.
As the November general election gains more attention since the first presidential debate in June, we can anticipate an increase in political noise and the potential for some associated market volatility.
Roehl & Yi will continue to diligently monitor potential market risks from US debt and international affairs, ensuring that investment decisions in our clients’ portfolios remain well-informed.
MARKET RECAP
Stock Market
While the S&P 500 performed well overall, there continues to be wide dispersion under the surface, with the Russell 1000 large-cap growth index up 8.33%, the Russell 1000 large-cap value index down 2.17%, and the Russell 2000 small-cap down 3.28% to close the second quarter (Source: Morningstar).
The table below is an overview of 2024 market performance for the quarter end, year to date, and a 2023 comparison.
*The MSCI EAFE Index is an equity index that captures large- and mid-cap representation across 21 Developed Markets and countries around the world, excluding the US and Canada.
Magnificent Seven Continue to Dominate
The S&P 500 Index remains dominated by the “Magnificent Seven” performance of the largest technology companies such as Microsoft (+19%), Google (+30%), Amazon (+27%), Facebook (+42%), and Nvidia (+149%).* These companies are performing exceedingly well and driving gains for the headline index but have, again, become expensive relative to their profits and sales (Source: Blue River). While positive news, we prefer a more balanced index rather than such a narrow lens.
*Year to date through June 30, 2024. “The Magnificent Seven” is an industry term, and this is not an endorsement of these seven stocks from Roehl & Yi.
Bonds Offer Appealing Opportunities for Investors
The 10-year US Treasury bond interest rates have averaged 4.6% over the last 250 years. After falling to nearly zero in 2020, the interest rate now sits at 4.20% as of July 11, 2024, which aligns with historical averages (Source: Bank of England).
Roehl & Yi views this as an attractive time to own bonds for two reasons. For one, higher interest rates mean higher coupon payments for bond investors, and two, the Federal Reserve is expected to cut interest rates either later in 2024 or early 2025. This creates the potential for capital gains as falling interest rates increase bond prices.
Strong State Rainy Day Funds Make Municipal Bonds Attractive
One bond sector to highlight is municipal bonds, with the caveat that municipal bonds are only appropriate in taxable accounts, and the benefit depends on the investor’s tax bracket. Municipal bonds are generally exempt from federal taxes, and the interest may also be exempt from state and local taxes if you reside in the state where the bond is issued.
As of June 30, municipal bond yields were 3.59% as measured by the Bloomberg Municipal Bond Index. Municipal bond yields are among the highest that they have been since 2008, and certain sectors and maturities now offer tax-free yields of over 4% (Source: Morningstar, Bloomberg).
In addition to the attractive yields, credit fundamentals remain strong within municipal markets. For example, median state rainy day funds are projected to be approximately 12% of expenditures in 2024 vs. pre-COVID levels, where medians were as low as 0-1%. The chart below shows the number of days each state could run on total balances. In 2009, the average state had savings that could last fewer than 20 days. That number has steadily increased since then, with the average state now being able to cover well over 100 days of expenses (Source: Pew Charitable Trusts).
THE ECONOMY
Higher Interest Rates Negatively Affect Household Spending
What is not spent from income must be paid for by borrowing. Higher interest rates are taking a more significant percentage out of household budgets, outside of mortgages. Interest rates on impacted non-mortgage loans (which have nearly tripled since 2020) include personal loans, home equity lines of credit, credit cards, and car loans (Source: Bureau of Economic Analysis).
Many Americans Now Have More Debt than Savings
During the COVID-19 pandemic, we saw a rapid accumulation of excess savings, mainly due to government support for US households via stimulus checks, and a steep decline in consumer spending as a result of health-related social distancing and business closures.
As of May 2024, economists estimate that US households have entirely spent the excess savings they had accumulated. These savings peaked at $2.1 trillion in August 2021, but by March 2024, they had turned negative at $72 billion (Source: Federal Reserve Bank of San Francisco).
US Air Travel Demand Is Breaking Records
While data suggests consumers may be burdened financially, Americans are flying. So far in 2024, the TSA has seen more US travelers than in pre-pandemic 2019, pandemic-year 2020, 2021, 2022, and 2023 (Source: Department of Homeland Security).
ROEHL & YI’S FINAL THOUGHTS
We are now seeing clear economic challenges upon us. The consumer, who traditionally powers economic growth, remains under several areas of stress.
Consider these three suggestions:
- Be mindful that the number one job of your portfolio is to manage risk.
- Seek out stocks that can offer long-term value.
- Maintain healthy cash reserves, avoid speculation, and be willing to capitalize on forthcoming opportunities.
As always, we are grateful for your continued trust in Roehl & Yi. Please call us first with any questions or concerns about your investments or other financial matters. May you and your family experience happiness and good health.
This report is provided for informational purposes only. Nothing herein should be construed as the provision of personalized investment advice, nor should it be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change without prior notice. Third-party data sources contained herein are for illustrative purposes only and are believed to be reliable, but we take no responsibility as to their accuracy. The newsletter contains certain forward-looking statements that indicate future possibilities. Due to known and unknown risks, other uncertainties, and factors, actual results may differ materially. As such, there is no guarantee that any views and opinions expressed herein will come to pass. Investing involves risk of loss including loss of principal. Past investment performance is not a guarantee or predictor of future investment performance. Any reference to the performance of securities of markets, indexes or specific investments is for illustrative purposes only and does not represent any of R&Y’s recommendations or performance. Any reference to a market index is included for illustrative purposes only as it is not possible to directly invest in an index. The figures for each index reflect the reinvestment of dividends, as applicable, but do not reflect the deduction of any fees or expenses, or the deduction of an investment management fee, the incurrence of which would reduce returns. It should not be assumed that your account performance or the volatility of any securities held in your account will correspond directly to any comparative benchmark index. The information contained herein is based upon certain assumptions, theories and principles that do not completely or accurately reflect your specific circumstances. You should not assume that any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice from R&Y or the professional advisors of your choosing.