Quarterly Market Update: 2024 Q2

Market Summary

Equity prices ended the first quarter of 2024 with solid gains, once again led by U.S. stocks. Rising U.S. Treasury yields put pressure on bond prices which finished the first three months of the year with a -0.78% return. In the commodities market, crude oil prices continued climbing on escalating Middle East tensions and gold reached a new record high of over $2,400 per ounce in early April.

INDEXASSET CLASS2024 YTD
DJ U.S. TOTAL STOCK MARKETU.S. STOCKS10.05%
MSCI AC WORLD EX-USAINTERNATIONAL STOCKS4.74%
BLOOMBERG U.S. AGGREGATE BONDBONDS-0.78%
Market returns year to date as of 03/31/2024

Optimism for Federal Reserve rate cuts in 2024 was a primary driver for the continued rally in equities. At the start of the year, Fed officials signaled their expectation of cutting rates three times, despite signs that inflation remained elevated. Predictions of how many rate cuts would occur and when they would start have been a moving target. Some economists were calling for as many as six rate cuts starting as early as March, but now some have changed their guess to as few as one rate cut in September. The economy is fluid and the Federal Reserve Open Market Committee digests key data on an on-going basis. They still see persistent inflation with their preferred indicator, the Personal Consumption Expenditures Price Index (PCE), up 2.7% year-over-year in March. Meanwhile, the job market remains strong with March’s unemployment rate dropping to 3.8%, down slightly from February’s 3.9%.

All the money flowing into U.S. stocks propelled the major indices to record highs, which leads to higher valuations. The chart below shows the S&P 500’s forward price to earnings ratio, which is one of the more common metrics to measure how expensive or cheap the stock market. On March 31st, the forward P/E ratio was 20.96x compared to 19.51x on December 31, 2023. This means investors were willing to pay more for stocks now than the prior three months. The significance of the 20.96 multiple is that it is above the +1 standard deviation line of 19.86. In simple terms, it means the stock market was significantly more expensive than it has been in the past thirty years.

Source: FactSet, FRB, Refinitiv Datastream, Robert Shiller, Standard & Poor’s, Thomson Reuters, J.P. Morgan Asset Management.

Examining the Balanced Portfolio

In investing terms, a balanced portfolio invests in both stocks and bonds to reduce potential volatility. This is in contrast to growth portfolios that consist of mostly stocks and less volatile income portfolios that focus on producing dividend and interest income. A very common asset allocation of a balanced portfolio is made up of 60% in stocks and 40% in bonds and low risk investments. This mix of investments has enough growth investments, yet nearly half the portfolio is in lower volatility holdings that produce consistent income.

Source: Bloomberg, FactSet, Federal Reserve, Robert Shiller, Standard and Poor’s, Strategas/Ibbotson, J.P. Morgan Asset Management.

The chart above shows the short-term and long-term performance numbers for three types of portfolios: all stocks, all bonds, and a 60/40 portfolio. Not surprisingly, the all stock portfolio has the best 1-year return of 52%, best average return of 11.4%, as well as the best 20-year rolling annualized return of 6% to 18%. However, during periods of high volatility, an all-stock investor could have 5-year and 10-year rolling periods of losses (-2% and -1% respectively). So it really requires a long-term investment horizon to stick with being in all stocks. In comparison, a 60/40 portfolio is the only one that does not have any negative returns in the 5-year, 10-year, and 20-year rolling periods.

Looking Forward

Global news events continue to weigh on the minds of investors. There are two major conflicts that continue to make headline news, as well as increased tensions amongst a few nations that possess nuclear weapons. China’s policymakers increased monetary, fiscal, and regulatory easing measures to pull the country out of their economic slump. For years, there have also been warnings of their impending real estate collapse. Another Asian country that investors see more optimistically is Japan, which is no longer in negative interest rate territory and has seen their stock market reach record highs after languishing for decades.

On the domestic front, we are inching closer to the presidential election. Whoever wins the White House and whichever political party controls Congress will get to influence the tax policies that were established by the Tax Cuts and Jobs Act of 2017, as many of its provisions expire at the end of 2025. Tax planning is an essential component in overall financial planning. Key Focus Wealth can work with you and your tax professional to plan your tax strategy as there will be significant changes to the laws in the next few years.

Wei Trieu, CFP®

View posts by Wei Trieu, CFP®
Wei Trieu is the founder and wealth advisor of Key Focus Wealth. He is a CERTIFIED FINANCIAL PLANNER™ professional who works directly with clients to develop and implement financial plans.
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