Resources

Market Performance

Overall, the market seemed to shrug off the unprecedented political events of the summer with almost all sectors across asset classes positive. The three domestic major indices were up with the Dow leading the group at 8.7% gains as improving fundamentals and solid earnings growth supported lofty valuations. Foreign developed and emerging markets were also up between 7.25%and 8%. The former benefiting from a weaker dollar while the latter the beneficiary of the announcement of a major stimulus package in China.

Drilling down in the US markets, the rally continued to broaden with small and mid-caps outpacing larger companies. The small and mid-cap indices were up 10% and 7% on the quarter with lower borrowing rates and favorable sector weightings (financial and industrials over technology and communication services) providing a tailwind to performance.

Fixed income markets were strong throughout the quarter as falling interest rates and inflation continuing to ebb helped support returns over the summer. The US 10-year Treasury yields fell from 4.5% in July to 3.8%by the end of September, with short-term rates dropping considerably faster with the heightened expectation of continued Fed cuts.

Overall, economic data releases showed positive signs, as hiring and consumer spending remained robust, and inflation continued to wane. All this is a constructive backdrop for stocks and bonds alike.

What to Watch Out For

Although the macro environment paints a rosy picture, there continues to be concerns that could derail what has been a banner year for investments. The primary market risk domestically is a further economic slowdown in the months ahead. The Fed will likely monitor the labor market as an indicator. Conversely, if inflation starts to pick up, the central bank may have backed itself into a corner and have to reverse course; an outcome that would have been unthinkable several months ago.

Foreign risks remain as well, with the increasing conflicts in the Middle East and Ukraine dragging on into multiple years. The recent slowdown in China presents a problem to buyers and sellers alike.  

And finally, political tumult will undoubtedly increase leading up to the November election, and maybe beyond. But whichever party occupies the White House in January will struggle to implement many of its goals. As both candidates continue to flesh out their hopeful policies, the likelihood of a split government (one party controlling the executive branch, the other the legislative) seems to be the most probable outcome and the appetite for across-the-aisle bipartisanship to work on overlapping agendas seems to be lacking. While that may be frustrating from a civil standpoint, it’s counterintuitively positive for markets as it doesn’t allow the pendulum to oscillate too quickly, creating a reasonable near-term case for positive market results.

As always, don’t hesitate to be in touch with questions or concerns.

Chad & your Longtide team

‍

‍Q2 Market Performance

As has been the case for the past year, the main drivers for stock performance were concerns about inflation and optimism for growth stocks. Markets entered April nervous about the inflation outlook, having already pared back expectations to three Fed cuts from five. Persistent inflation readings sent stocks and bonds lower in April. However, with inflation easing in May, both benefited from a more benevolent rate outlook. Even as the Fed signaled that they only expect one rate cut this year, domestic markets regained their footing and rallied to end the quarter in positive territory.

Companies exposed to artificial intelligence continued to outperform other areas of the market. A strong earnings season for US tech companies meant growth stocks were once again the top performing asset class. Large cap growth was up 4.7% for the last three months and 15% on the year. Size and style dictated winners. Large caps are up 18% while small caps are up less than 2%. Growth is up 11%, while value is trailing by 4%.

Fixed income markets also had a solid June to cap off a positive quarter. Returns were supported by falling long-term interest rates as the US10-year Treasury yields ended essentially flat after spiking intra-quarter. On the year, the 10-year has risen from 4% to 4.36%, but the long-term outlook has rounded the corner to the benefit of bond investors.

Overall, inflation improvements caused interest rates to fall in June, which supported stocks and bonds.

What to Watch Out For

While the markets are painting an optimistic picture, there remain concerns. From a market perspective, inflation continues to be the most pressing. We saw this in April when the previous month’s inflation report caused a sell-off. While inflation pressures are improving somewhat, the latent anxiety of price pressure remains.

Additionally, election-related uncertainty is ever increasing. Snap elections in France and the UK saw incumbent parties face strong challenges. Domestically, every day sees a new ripple in the US Elections. November is a long way away, and the markets don’t like uncertainty. Under these circumstances, volatility is to be expected and is normal, especially during general election years which are typically 50% more volatile than other years.

Given the lack of clarity in the elections, it’s important to remember that the best inoculation for political uncertainty is to have a diversified portfolio, rather than to make trades based on potential outcomes that may or may not come to fruition.

As always, don’t hesitate to reach out if you have any questions. Enjoy the rest of your summer!

‍

Chad & the Longtide team

‍

‍

Q1 Market Performance

Across all sectors, sizes, and styles, US stocks benefited from stronger-than-expected economic growth at the end of last year and the start of this year. GDP growth came in above estimates, and we experienced solid job growth and consumer spending to kick off 2024. The S&P 500 was up 10.5% led by communication services (16%), energy (14%) and information technology (13%), with real estate the only negative sector at -0.5%. While large-cap outperformed other sizes at 11%, it wasn’t the disparity of last year with mid-cap up 9% and small-cap up 6%. Both growth and value advanced by 8% but lagged the blend style by 3%.

On the back of rising rates, the bond market struggled throughout the quarter. The Bloomberg Aggregate Index was down 0.8% while the municipal equivalent was down 0.4%.

Economic growth was largely positive; however, this caused inflation to remain stubbornly high. While there were modest improvements in getting year-over-year inflation down in 2024, both headline and core remained above the Fed’s 2% target. As a result, investors reassessed their expectations for monetary policy going forward, leading to rising interest rates throughout the past quarter.

‍

What to Watch Out For

With the economic resilience and persistent inflation, markets have adjusted their Fed expectations. The year started with futures markets pricing in six interest rate cuts by the end of 2024; we ended March down to just three. This realignment put upward pressure on rates but may lower the risk of Fed-driven volatility for the rest of the year.

Healthy earnings growth for U.S. companies came in well above analyst estimates and helped guide the stock market to rally at the start the year. Further earnings growth is expected ahead, with analysts calling for expansion in all four quarters this year. Over the long run, fundamentals drive market performance, so this anticipated return to consistent earnings growth could be a positive sign for investors in 2024.

Despite the solid start to the year for markets and the economy, some risks remain for investors. The continued conflicts in Ukraine and the Middle East could spark further uncertainty in these regions and pressure the shaky global supply chains. The November election will also be worth watching, as we’ll likely see further political uncertainty as we approach the end of the year. Ultimately, while these risks are real and should be acknowledged, they’re not necessarily pressing at this time.

Ultimately, the market and economy remain in a good place. The economic backdrop remains supportive, and with earnings growth improving, the market continues to be on solid footing. The most likely path forward is a strong economy and market appreciation, but we’ll likely face short-term setbacks along the way.

‍

As always, should you have questions or concerns, don’t hesitate to reach out. We’re here to help.

‍

Chad & the Longtide team

‍