Investors' Concerns

The second quarter of the year the S & P 500 rose 4.27% propelling the index to a record high and up year to date 15.27%. Artificial Intelligence (AI) continued its surge, but it is starting to make analysts nervous. Only semiconductors outperformed the S & P 500, a very narrow group of stocks. However, the AI theme has extended beyond just technology. We are seeing utility and energy stocks beginning to participate as potential AI beneficiaries. Over the past 18 months there has been a divergence between the S&P 500 Composite and S&P 500 Equal Weight due to the dominance in large cap technology stocks that make up the index. This concentration in the few stocks that make up the S&P 500 has analysts worried that there could be potential trouble ahead. What concerns analysts is the economic data is signaling a downturn may be ahead and the stock market is ignoring the signal. To compound the analysts concerns investors have become infatuated with the AI advancement and investors continue to drive up only a handful of stocks.  

Although the analysts see valuations high in a concentrated technology basket of stocks, investors have other concerns with respect to two main topics: Inflation and the Election. On the one hand inflation has been stubborn and prices have not fallen to lessen the effects on their everyday spending needs. On the other hand, the election is creating emotional stress in the form of being anxious. Investment management firm Janus Henderson found that 78% of affluent investors are voicing concern about the election. A third poll, from Nationwide Retirement Institute, found 76% of investors on edge. This added anxiety about uncertainty can cause investors to act erratic and make emotional decisions.  

Inflation 

Inflation does not change the habits of the upper middle class or the affluent, it affects most individuals with little to no financial assets. Inflation this year has overshadowed the 2024 election campaigns. In 2023 as rates were rising, investors would react positively to any good news on inflation. When the Federal Reserve signaled three rate cuts in early 2024, investors were excited. Anticipation of rate cuts happening in the first quarter of 2024 disappointed investors, and they sold off in April to show their discontent with the Federal Reserve (Fed) leaving rates unchanged. This speculation on rate cuts by investors has created volatility every time the Fed meets. Recently, the Fed has indicated they will cut rates when the inflation numbers give them confidence that the data is heading in the right direction. 1Inflation is currently at 3.27% and the long-term average has been at 3.73% since 1958. Although it peaked at 9.1% in 2022, it has fallen significantly but prices have not fallen. 2Grocery prices have not fallen due to labor shortages tied to the pandemic, ongoing supply chain disruptions, droughts, avian flu, and other factors beyond the current administration’s control. In addition, there has been a consolidation in the grocery industry enabling large chains to keep prices high according to economic policy experts. Unfortunately, prices do not adjust down they simply stabilize. To offset the rise in prices, wages need to increase to make up for the price increases. 3,4Historically, in the 1950’s a pound of ground beef was fifty-three cents compared to $5.14 per pound in 2024 according to the Federal Reserve Bank of St. Louis.   

5The average family household income in 1950 was $3,300 and in 62024 the average median household income according to the U.S. Bureau of Labor was $69,717. Wages have not kept pace with price increases. Inflation affects consumers in several ways, however increased wages are the key to staying even or above price increases. The Federal Reserve’s job is to stabilize inflation to allow wages to catch up or stay ahead of the increases. Based on the economic data there is a high probability that a rate cut could happen this year if the data shows a slowing down in the economy. However, economists are expecting rate cuts in 2025 as they see various sectors slowing down. It is not a question of whether rates will come down, it is when will the Fed reduce rates.  

Election 

Investors are concerned about the upcoming election given what has been in the news.  Although the concerns are real no matter which candidate is our next president the predictions as to what happens in the markets is usually wrong according to many supporting facts.   In fact, over time the economy and stock market have generally marched higher through Democratic and Republican administrations.  7The chart below helps to understand how we have advanced with changes in the White House and Interest rates:  

Although respectfully each political party will make claims to good times and blame the other party for bad times, both parties according to the chart above have done a pretty good job on the growth of our portfolios.  If we focus on the short-term, we would have missed the long-term results of staying invested when our candidate is not in the oval office.  We don’t ignore election years or the party that is in office but there are many factors that move markets higher or lower through the economic cycles. Whoever is sitting in the White House doesn’t determine the asset allocation or the risk tolerance of an investor.  

Uncertainty and anxiety can focus our attention on the negative which can cause us to lose sight of the positive. According to behavioral scientists, the anxiety-influenced investor can choose to focus on threatening information and sometimes will even seek out negative information to support their growing beliefs that poor results are the outcomes. Compounding the thought process is uncertainty. Since no one knows when certain events will trigger a downturn in our portfolios, we need to be mindful to our asset allocation as it relates to our lifestyle needs.  

We recognize that the markets have increased over the last eighteen months particularly in the Large Growth sector, Technology, and any AI related equities. We believe that although these areas are part of the overall asset allocation, we should take the opportunity to rebalance the overall portfolio to bring the asset allocation in line with the agreed upon risks. Reallocating does not mean these areas will not continue to rise, it is simply our philosophy to take profits and add to areas that are underweighted to bring the level of risk back in check. Opportunities exist in small to midsize companies and select international regions along with high quality bonds. When the Fed cuts rates bonds will appreciate. Profit taking may only be a minor shift in the allocation but a prudent one. Keep in mind that volatility is your friend if you have a long-term view since you may be adding to your portfolio on a regular basis at lower prices. Diversification allows you to hold equites during rough patches in the market and the bonds/cash holdings allow you to not sell the depressed equites should we see a market downturn. Our philosophy and strategies have been time-tested over the years. We believe that to be successful through all market cycles, investors need to take a long-term view. The current environment of uncertainty is part of the cycle. Keep in mind that fear and anxiety can derail a well-crafted portfolio. Stay the course as the election approaches and reach out to us to discuss any concerns.  

We welcome your thoughts in the coming months as we move through the second half of the year. We hope that your summer is going well. We look forward to our conversations.  

^{1] Source Bureau of Labor Statistics, July 8, 2024. Average Inflation 1958-2023.}

^{2] Source: Economic Policy- Inflation has fallen. Why are groceries still so expensive? By Abha Bhattarai and Jeff Stein February 2, 2024}

^{3] Source: Federal Reserve Bank of St. Louis June 12, 2024}

^{4] Source: The People History: Food Groceries and Toiletries in the 1950’s prices 50…}

 ^{5] Census Bureau, Department of Commerce October 8, 2021}

 ^{6] Yahoo! Finance: How Do You Stack Up to the Average Income in Your State, Daria Uhlig, Tue, Apr 16,2024}

 ^{7] Source: Morningstar and FRED, 4/24. Hartford Funds: The Market is Mightier Than Politics and Policy}

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