Greetings
We here at Pacific Leader Financial hope that you’re having a great summer! Below is the Quarterly Investment Update for Q2 2024.
At the halfway point of the year, markets have been appreciating significantly. That sounds good, right? The issue is that only a few stocks have represented the vast majority of those gains. About 60% of the S&P 500’s total return of more than 12% for the year has been driven by five companies whose shares have some of the heaviest weightings in the index: Nvidia, Microsoft, Meta Platforms, Alphabet and Amazon.com, data from S&P Dow Jones Indices showed. This overreliance on so few equities has some investors nervous about a possible correction. But, there’s little details as to what that correction could look like or when it might happen. For now, investors are riding the gravy train that looks like it isn’t stopping anytime soon. It’s tempting to say the growth trajectory will continue, but we believe the economy will soften in the second half, which will naturally have domino effects across the investing arena.
Despite the ‘will they, won’t they’ drama around the Fed and interest rates, Jerome Powell has been consistent in his strategy of keeping interest rates elevated to combat inflation. To review, keeping money expensive to borrow is intended to stifle economic growth. It becomes more expensive to bring new products to market, buy equipment, and spoiler alert, hire new employees. June unemployment came in at 4.1%, historically low, but higher than what we’ve become used to. The recent batch of inflation numbers have been trending down but only slightly. The collective hope is that this minor blip is going to be representative of a larger trend to ever lower inflation numbers. But hope isn’t data. As of right now, it’s hard to tell if we’re turning the corner or if it’s just a bump in the road.
For some perspective, one of the indicators that a recession is likely is the inverted yield curve. This is where short-term bonds (like the 3-mo treasury note) earn more interest than long-term bonds. That curve became inverted back in early July of 2022! Yet we’ve seen a massive increase in the markets and nothing that could really be called a recession.
Supply chains are getting better despite the disruptions in the Red Sea. The Purchasing Manager’s Index (PMI), a popular metric and leading indicator of business optimism, increased in recent months primarily due to the rebound in the services industry. Retail sales indexes, considered a lagging indicator, are a mixed bag showing that consumers are becoming more selective.
Four of the eight largest banks have recently failed a test conducted by regulators to show how they could wind-down operations should another 2008 financial crisis happen. Bank of America, Citigroup, Goldman Saches, and JPMorgan Chase need to refine their ‘living wills’, a formal plan to unload trillions of financial derivatives if the need to arises. To be clear, this test is not an indicator that banks are at risk of failing. This is good news that the regulators are scrutinizing the largest banks to mitigate the impact of one failure from spreading to other banks.
One last word about the upcoming election, I’ll reiterate what I’ve mentioned numerous times. The economy is so much larger that who or what party occupies the White House. The data is very clear. Markets are extremely rational and may react to extraordinary events but quickly settles back into business as usual. The weather has more impact on markets than presidential campaigns. We expect that resilience will continue into to the future. We still expect to see economic growth mixed with stubborn, but decelerating inflation.
We here at Pacific Leader are always here to answer your questions. And of course, we’re never too busy for your referrals.
It’s a privilege to serve you.
Sincerely,
Matthew Dennis, CPA, AIF
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.