Update from the First Half(ish) of 2024
We are a little more than half-way through 2024, and so far, it has been a good year for most diversified investors.
The S&P 500 finished June up about 15% for the year. Few experts saw this coming. I think 2024 should serve as another reminder that making accurate, short-term predictions is both:
Very hard, and
Extremely difficult to do with any sort of consistency.
Here are a couple of examples:
DECEMBER 2023: Sam Ro, a popular financial journalist and author, shared some forecasts from well-known Wall Street strategists last December. Those targets are summarized in the chart below. The median S&P 500 price target was 4,775.
NOW: The S&P 500 ended June at 5,460. That’s 14% higher than the median year-end target!
DECEMBER 2023: The Fed was expected to cut interest rates six (6) times this year. The likelihood rates stayed flat or rose was 0%.
NOW: The Fed has not cut rates. The Fed Funds target rate (or range) is exactly where we started the year. But – wait for it – the likelihood of a cut from the Fed in September is now 100%!
We continue to encourage clients to remain focused on aligning their goals with their investments. Short-term goals deserve short-term investments. Long-term goals deserve long-term investments. Have a written plan to help reduce the impact emotions can have on your investment strategy.
The First Half Themes and Observations
Here’s how I would generalize the first half themes. Bullets and charts are below.
Big companies were better to own than small companies.
“Growth” companies were better to own than “value” companies.
US companies were better to own than foreign companies.
Cash was better to own than bonds.
AI went mainstream, taking their shareholders along for the ride. Nvidia is the most obvious example. The GPU maker returned about 150% during the first half of the year.
Aside from these broad oversimplifications, diversified investors fared pretty well. A portfolio of 60% US stocks and 40% bonds gained almost 8%.
Diversifying away from large US growth stocks generally hurt returns. Still, many of these pockets of the market trade at more lower valuations than the recent leaders, at least based on historical norms.
The following are some observations and data points I found interesting.
Tech dominated: The technology sector was responsible for more than half of the S&P 500’s return (8.3% for technology and 15.3% for the S&P 500). If you didn’t own tech, your portfolio probably had a tough time keeping pace with the broader market.
Haves vs. Have Nots: Stocks that beat the S&P 500 tended to beat it by a wide margin. The rising tide of artificial intelligence, or AI, has been a significant tailwind for companies exposed to (or even creating) this relatively new trend. Two years ago, I suspect the typical American had never heard of Nvidia. Now, it’s a household name (or close to it) and one of the most valuable businesses on the planet. Many other companies are being left behind, at least for the moment. Consider:
The average return for all stocks in the index was just 5.15%. Roughly a quarter of stocks in the S&P 500 outperformed the index.
The average return for those stocks who outperformed was a whopping 27.3%.
The average return for stocks who underperformed the index was -2.1%.
This may be reminiscent of the late 1990s, for those who were investing at that time. The Internet became a global phenomenon. Companies were adding “.com” to their names, attempting to signal to investors that they, too, were in the game. Small and value-oriented stocks couldn’t keep up.
If expectations for AI turn out to be too high, at least from a revenue and profit perspective, investors are likely be disappointed.
Not all bad for small stocks: Smaller companies have generally struggled to keep pace, but there have been some bright spots, particularly in energy and industrials, which were both up over 7% for the year.
Small caps have started to significantly outperform other parts of the market. So far in July (as of July 29), small caps are up 9.4%, while the biggest “mega” cap stocks are down about 0.2%.
Bonds Still Struggling: Core bonds had a negative 5-year return, through June. For those of us American investors born after 1980, this is one of our first experiences watching bonds struggle for a reasonably long period of time. Remember, from 1982 through the 2010s, interest rates were typically falling, which means bond prices were typically rising.
Most bond categories have started to perform better in recent months, though, as interest rates have moved lower from their recent highs.
Inflation and interest rates. On the topic of bonds…the Federal Reserve is scheduled to meet four more times this year, in July (which just happened), September, November, and December.
As I mentioned above, investors are nearly certain a rate cut is coming in September. Will they be right this time? In July of last year, there was about a 93% chance rates would be lower than they currently are. Forecasting is hard.
One thing we know for sure. Interest rates today are higher than they have been in recent years. Whether you own bonds for income, diversification, or some other reason, their returns are usually dependent on the income.
In May of 2020, loaning $100,000 to the U.S. government for 10 years would have resulted in annual interest payments of about $600. Not great, especially if you owed tax on that income.
That same $100,000 loan today would now yield about $4,400 per year in interest income.
Higher rates could represent a more attractive starting point for bonds compared to the recent past.
Thank You
We try hard not to focus too much on short-term results. At the same time, we always want clients to understand why their portfolios are performing in a certain way, even if no tweaks are necessary.
If you would like to discuss anything in more detail, please don’t hesitate to reach out.
And thanks, as always, for your trust in our team.
“Big” represented by the iShares Russell Top 200 ETF (IWL). “Small” represented by the iShares Russell 2000 ETF (IWM). “Growth” represented by the Russell 3000 Growth Index. “Value” represented by the Russell 3000 Value Index. U.S. represented by the iShares Russell 3000 ETF (IWV). Foreign represented by the iShares MSCI ACWI ex US ETF (ACWX). Cash represented by the US Treasury 3 Month Bill ETF (TBIL). Bonds represented by the iShares Core US Aggregate Bond ETF (AGG).
“Haves and Have Nots” uses SPDR® S&P 500 ETF Trust (SPY) as a proxy for the S&P 500 Index.
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