Market & Economic Commentary: Q2 2024
Quarter in Review
In the second quarter of 2024, markets continued to navigate evolving interest rate expectations and the monetization prospect of Artificial Intelligence. Concern about persistent inflation led to a decline in equity markets in April. However, moderating inflation and positive company news inspired a significant rebound in May, followed by moderate fluctuations in June. Fixed-income markets experienced a bumpy ride as well, finishing slightly higher.
For the quarter, equities generally rose, with the S&P 500 up 4.3% and gaining 15.3% Year-To-Date.1 In contrast, the equal-weighted RSP index finished the first half up 4.6%. The market-weighted S&P index gives more weight to larger companies based on their market capitalization. In contrast, regardless of size, the equal-weighted S&P 500 index assigns the same weight to each company.
This divergence between the two indexes, comprised of the same 500 stocks, illustrates the impact a handful of large capitalization stocks has had on the broad market performance. At the end of the quarter, the three largest stocks in the S&P 500 - Microsoft, Apple, and Nvidia - comprised nearly 21% of its total marketvalue.2 Whileinvestingintheselarge-captechstockshasservedinvestorswellinrecentquarters, it is essential, as we invest for the long term, to recall that, past eras have similarly been dominated by a handful of stocks: at one point, the three large automakers were the leaders of the market while as recently as 2001, the Palm Pilot and Nokia phones were cultural touchstones and the top S&P 500 companies were G.E., Exxon, and Cisco.3 4 The important takeaway from this comparison is that market leadership changes over time, and maintaining a broadly diversified portfolio is the best way to future-proof your holdings for the long term.
Inflation Moderates as Growth Continues
Despite a bump earlier in the quarter, inflation data have begun to indicate that the Fed is winning its battle against persistent price increases. A slight easing in the tight labor market and some high-profile announcements by large chains of price rollbacks give us a bit of comfort that the worst of the price increases are well behind. Meanwhile, a recent rebound in consumer spending and inflation-adjusted disposable income, as seen below, indicates that the largest component of US GDP growth remains on track.
At a recently revised 1.4% annual growth for the first quarter, GDP expansion remains modest and not too hot, allowing the Federal Reserve to contemplate lowering interest rates. Indeed, some emerging stresses, such as rising credit card delinquencies and pain points in the commercial real estate market, argue in favor of loosening. This optimistic outlook was reflected in market behavior in the final weeks of the quarter.
Election Year Volatility and Risk Tolerance
As we approach the heart of the U.S. election season, we anticipate a rebound in market volatility, which is normally above average in the three months preceding elections.5 Nevertheless, markets tend to stabilize following the election, and there is no discernible pattern that favors one party over another. That said, it is impossible to ignore that this election cycle includes a distinctly unique degree of polarization and dire prognostications. While companies and the U.S. economy have a proven history of resiliency in the face of policy alterations and swings in administration priorities, wholesale and drastic changes to the economic regime of relatively open markets could, indeed, cause short-term upheaval. Frequently, there is a wide divergence between campaign rhetoric and ultimate policy, but this is a concern we will need to monitor.
In that context, risk tolerance is a critical yet often misunderstood aspect of investing. It reflects an investor’s psychological comfort with uncertainty, where both success and failure are possible outcomes.
However, risk tolerance isn’t just tied to numbers but also carries an emotional component, often influenced by individual predispositions. It’s akin to food preferences—some relish the thrill of trying new exotic delicacies while others find comfort in their favorite tried-and-tested meals.
In investing, those with high-risk tolerance generally lean toward potentially high-reward situations despite the risk of potential losses. Conversely, those with lower risk tolerance prefer to avoid such perceived threats, focusing more on preserving their initial capital. Remember, neither high- nor low-risk tolerance is necessarily good or bad. Each can lead to positive or negative outcomes—or sometimes a bit of both.
Furthermore, risk tolerance isn’t constant but can change depending on the scenario or over time, so coupling long-term investment decisions with an understanding of your comfort level with risk helps you create a portfolio with which you can be comfortable over time and avoid sleepless nights during periods of volatility.
Indeed, on a daily or even quarterly basis, the herky-jerky nature of the ups and downs can test your risk tolerance. The chart below shows the daily returns of the S&P 500 over the past 40 years. Watching markets daily looks like this.
However, if we look at the same 40 years through a different lens, we start to see another story emerge - one that rewards patience and better aligns with long-term investment goals. As we look ahead to a highly divisive election cycle, keep in mind that this graph covers periods that include a massive terror attack on U.S. soil, a profound global banking crisis, and a global pandemic. It is the same ride, with daily ups and downs. Still, shifting perspective helps to validate the rewards of investing for the long term and lower the potential signals that negatively trigger risk tolerance.
Key takeaway: keep your eyes on the long run!
Index Disclosure and Definitions
Investors cannot invest directly in an index. Indexes have no fees. Historical performance results for investment indexes do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment management fee, the occurrence of which would have the effect of decreasing historical performance results. Actual performance for client accounts will differ from index performance.
S&P 500 Index represents the 500 leading U.S. companies, approximately 80% of the total U.S. market capitalization. Dow Jones Industrial Average (DJIA) Is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.
The Nasdaq Composite Index (NASDAQ) measures all Nasdaq domestic and international based common type stocks listed on The Nasdaq Stock Market and includes over 2,500 companies.
MSCI World Ex USA GR USD Index captures large and mid-cap representation across 22 of 23 developed markets countries, excluding the US. The index covers approximately 85% of the free float-adjusted market capitalization in each country.
MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets (as defined by MSCI). The index consists of the 25 emerging market country indexes. Bloomberg Barclays US Aggregate Bond Index measures the performance of the U.S. investment grade bond market. The index invests in a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States – including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities, all with maturities of more than 1 year.
Bloomberg Barclays Global Aggregate (USD Hedged) Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging market issuers. Index is USD hedged.
© Morningstar 2021. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied, adapted or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information, except where such damages or losses cannot be limited or excluded by law in your jurisdiction. Past financial performance is no guarantee of future results.
The Kaminsky-Silverman Group utilizes Symmetry Partners, LLC (SP), which is a third-party service provider that supplies market data and assists in creation and monitoring of factor-based investment models. SP is also an investment advisory firm registered with the Securities and Exchange Commission. All data is from sources believed to be reliable but cannot be guaranteed or warranted. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, product or any non- investment related content made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may not be reflective of current opinions or positions. Please note the material is provided for educational and background use only. Moreover, you should not assume that any discussion or information contained in this material serves as the receipt of, or as a substitute for, personalized investment advice.
Diversification seeks to improve performance by spreading your investment dollars into various asset classes to add balance to your portfolio. Using this methodology, however, does not guarantee a profit or protection from loss in a declining market. Past performance does not guarantee future results.
This material is confidential and is provided for informational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Investment return and principal value of an investment will fluctuate; therefore, you may have a gain or loss when you sell your investment. Any opinions, expectations and projections within this document are solely those of the Portfolio Manager(s) and/or Financial Advisor(s) identified, and do not necessarily represent the viewpoint of Shufro, Rose & Co., LLC or other Portfolio Managers at the firm. This report was prepared by Shufro, Rose & Co., LLC and is presumed to be correct. Shufro, Rose & Co., LLC is an investment adviser registered with the Securities and Exchange Commission. ADV Part 2A is available upon request or at https://adviserinfo.sec.gov/. Please contact Shufro, Rose & Co., LLC at (212) 754-5100 with any questions.
1 RSP price. YCharts. (n.d.). https://ycharts.com/companies/RSP/price
2 Why your fund manager can’t beat Today’s stock market. (n.d.). https://www.wsj.com/finance/investing/why-your-fund-manager-cant beat-todays-stock-market-a5a14688
3 FinHacker. (n.d.). Top 20 S&P 500 companies by Market Cap (1990 - 2024). FinHacker.cz. https://www.finhacker.cz/top-20-sp-500-companies-by-market-cap/#2001
4 The magnificent 7 tech stocks aren’t unique—and ... (n.d.-a). https://www.barrons.com/articles/magnificent-7-unique-future-nvidia-b01fa09e
5 The relationship between elections and volatility - openmarkets. CME Group. (n.d.). https://www.cmegroup.com/openmarkets/equity- index/2024/The-Relationship-Between-Elections-and-Volatility.html
