Monthly Commentary

Hello,

I hope all is well and that you are enjoying a safe and joy-filled summer!

Over the past week, global stock markets tumbled with the S&P 500 posting its worst day in almost two years. The steep decline came after weaker-than-expected jobs data leading to speculation in the markets of a potential recessionary environment on the horizon[1]. Technology, Artificial Intelligence in particular, has been the primary catalyst for the market surge over the past year and a half. The tech focused Nasdaq Composite hit an all-time high of 18,641.53 on July 15th. It has since retraced back to 16,366.85 as of the close of business August 6th, representing a decline of over 12% during that time period and placing the index squarely in correction territory[2]. Indexes across the board have endured similar volatility recently. The small company Russell 2000 index remains the weakest performer across U.S. indices, returning 1.35% YTD as of August 6th, 2024[3]. Meanwhile, the bond markets have shown greater resilience to begin the third quarter, with the iShares Core U.S. Aggregate Bond Index returning 2.61% YTD[4]. Since the S&P 500 reached an all-time intraday high of 5,669.67 on July 16th, the index has dropped nearly 8% to 5,240.03 as of the close of business August 6th[5]. This is our first correction of 2024. A market correction is commonly described as a drop of more than 10% from the highs up to a drop of 20%. A decline greater than 20% off highs is considered a crash. Since World War II there have been 24 stock market corrections, averaging a downturn of 14.3%. Historically speaking, it has taken five months to reach the “bottom” of a correction. Subsequently, the average recovery time for a correction has been four months![6]. It is fair to say corrections are common and a normal part of market behavior, albeit painful.

I believe the current environment is unique in that we are operating with the expectation that the U.S. Federal Reserve (Fed) will begin cutting rates as early as September. How does the market generally perform when the Fed begins cutting rates? In the 12-months after the Fed starts cutting rates, the average return on U.S. stocks has been 11%. This is based upon the 22 U.S. interest rate cutting cycles since 1928[7]. Interestingly, while small company stocks in the Russell 2000 index have been the worst performer over the past three years as far as U.S. indexes, small company stocks demonstrate some of the strongest returns post rate cut. Following the last rate cut of each cycle, the Russell 2000 returned an average of 36% over the next 12 months and a cumulative 42% over the next 24 months[8].

Since the last economic commentary, inflation has eased from 3.5% in March to 3% in June[9]. This, along with concerns of a global slowdown tied to prevailing higher rates in the US, will place more urgency on the Fed to begin lowering rates sooner rather than later. A very positive sign is the strength of our U.S. companies. Overall, 75% of the companies in the S&P 500 have reported results for Q2 2024, as of August 2nd. Of these companies, 78% have reported Earnings Per Share (EPS) above estimates. The index is reporting its highest year-over-year earnings growth rate since Q4 2021[10]!

Ultimately, lower inflation and strong corporate growth remains the recipe for continued market success. While the prospect of a recession is very real, it seems unlikely at this time. This remains a fluid situation, and I remain optimistic we are trending in the right direction on this front. As we have historically, I believe we will continue persevering through any adversity!

I remain steadfast in my belief in long term planning, preparation, and proper diversification, while aligning your portfolio to your comfort level for risk. Time and time again, it is proven that markets cannot be timed. No one has a crystal ball, and no one knows what major world event will occur next. Our best strategy is to be well-diversified, across asset classes and remain optimistic and vigilant during times of fear and panic. Our companies remain some of the best in the world, providing goods and services to every corner of the earth. Our people are some of the brightest and hardest working people in the world. I believe in the long-term trajectory of the U.S. and global economy!

Thank you for the opportunity to serve you. My priority remains and always will be to ensure that you continue to receive high quality guidance and client service experience second to none. While I continue to reach out via phone and e-mail, please know that I am available via Zoom, Facetime, any other digital technology you prefer and in person if you would like to meet. I am happy to meet with you at any one of my offices or at your home or near your home, whatever you prefer and with whatever you are most comfortable.

Wishing you, your family, friends, colleagues and community continued hope, health and positivity in the coming weeks, months and beyond!

Thank you!