Atticus Wealth Management

THE VIEW FROM THE TOP

Market Commentary from Atticus Wealth Management
May 2024 – 2nd Quarter

Five Insights for Long-Term Investors in the Second Half of 2024

As we enter the second half of the year, it is essential for long-term investors to maintain perspective on the major events that have driven markets. Despite ongoing economic uncertainty, the stock market has experienced a strong rally as investors anticipate the first Fed rate cut and the continued rally in artificial intelligence stocks. In the first six months of the year, the S&P 500 gained 15.3% with dividends, the Nasdaq 18.6%, and the Dow Jones Industrial Average 4.8%.
Meanwhile, the 10-year Treasury yield declined from its April peak of 4.7% to 4.4%, resulting in the overall bond market remaining roughly flat on the year. International stocks have also performed well, with developed markets generating a 5.7% return and emerging markets 7.7%.

This strong performance may have caught some investors off guard, while others may not have been properly positioned to take advantage of the upswing across many asset classes. Market sentiment can often shift rapidly, especially with significant investor and media focus on short-term events. For instance, the anticipated recession at the beginning of the year has not materialized, and there are signs that inflation, which was higher than expected for a few months, is beginning to improve.

Looking ahead, the market’s focus will shift toward major events in the second half of the year. The upcoming presidential election is perhaps the most notable. As investors prepare to cast their ballots in November, they will also consider what each political party could mean for their portfolios and financial plans. Investors will closely watch the timing and number of Fed rate cuts since lower rates are generally positive for both stocks and bonds.

While the outcomes of these events are uncertain and introduce new risks, the first half of the year serves as a reminder that overreacting to day-to-day headlines, at the expense of long-term underlying trends, can often result in poor investment decisions. History shows that it is crucial to separate personal feelings around politics from financial decisions to stay invested, diversified, and disciplined. Here are five key facts all investors should keep in mind to stay levelheaded through the rest of 2024 and beyond.

1 The Market Continues to Reach New All-Time Highs

The S&P 500 achieved over 30 new all-time highs on its way to a 15.3% gain in the first half of the year. While this is positive, it can also make many investors nervous. When the market is in uncharted territory, it’s easy to worry that it may be “due for a pullback.”

The reality is that price swings are an unavoidable part of investing and the market will certainly pull back at some point. However, the timing of these declines is difficult if not impossible to predict. At the same time, major stock market indices will naturally spend a significant amount of time near record levels during bull markets, as shown in the accompanying chart. Trying to time the market tends to be counterproductive for this reason.

2 With Inflation Cooling, the Fed May Cut Rates Later This Year

Investors have anticipated the first rate cut of the cycle since the beginning of the year, driving returns and causing market swings when new economic data shifted expectations. The latest inflation data in May showed a significant deceleration, preserving the possibility of a rate cut this year. Many of the additional rate cuts that investors previously expected have been pushed into next year and will depend on economic data over the next six months. Regardless of the exact timing and path of Fed rate cuts, these projections represent a reversal of the emergency monetary policy actions that began in early 2022.

The accompanying chart shows the possible path of the federal funds rate based on the Fed’s latest projections.

3 Steadier Rates Support the Bond Market

The path of interest rates has been highly uncertain over the past few years due to inflation, economic growth, and the Fed. Higher rates have defied the expectations of investors and economists, creating a challenging environment for the bond market, since rising rates push down bond prices.

After hotter-than-expected readings in the first quarter of the year, the latest Consumer Price Index data showed no
change in overall prices in May for the first time in almost two years. Core CPI rose 0.2% in May, or 3.4% year-over-year, a healthy deceleration from the previous month’s 3.6% pace. Other data, such as the Personal Consumption Expenditures index that the Fed favors, and the Producer Price Index, have shown similar patterns.

These developments, along with new Fed guidance, have pushed rates lower in recent days, supporting bond prices. The Bloomberg U.S. Aggregate Bond Index, a measure of the overall bond market, is nearly flat on the year after declining as much as 4% in April. This is in sharp contrast to 2022 when bonds fell into a bear market during the historic jump in interest rates, before stabilizing and rebounding in 2023.

4 Many Investors Remain on the Sidelines in Cash

In times of market uncertainty, investors often seek the safety of cash. This has been true over the past several years as markets have swung due to the pandemic, geopolitical events, Fed rate hikes, inflation, gridlock in Washington, technology
trends, and more. Additionally, interest rates on cash are at their highest levels in decades, making it appear that there are attractive “risk-free” returns.

While cash is important, it can become problematic when investors hold too much cash. This is because cash is not truly risk-free for two important reasons. First, inflation quietly erodes the purchasing power of cash over time. So even if yields appear to be high, the real value of your money could decline.

Second, the prospects for cash will only worsen if and when the Fed does begin to cut rates. Investors would be forced to reinvest their cash either at lower interest rates or in stocks and bonds whose prices would most likely have already risen.

5 The Presidential Election Is Heating Up

Coverage of the presidential election is heating up. While elections are an essential way for Americans to help shape the direction of the country as citizens, voters and taxpayers, it’s important to vote at the ballot box and not with investment portfolios.

History shows that markets can perform well under both major political parties. As the accompanying chart shows, the economy and stock market have grown over decades regardless of who was in the White House. What mattered more across these periods were the ups and downs of the business cycle.

Of course, politics can impact taxes, trade, industrial activity, regulations, and more. However, not only do policy changes tend to be incremental, but also the exact timing and effects are often overestimated. Thus, it’s important to focus less on day-to-day election poll results and more on the long-term economic and market trends.

6 Looking Ahead

Atticus’ latest analysis of the stock market presents a cautious outlook in the near-term. The benchmark S&P 500 (SPX) has reached an all-time high, creating over-extended conditions that suggest potential for a significant corrective decline. Apple (AAPL) and Microsoft (MSFT) have met upside targets, and their performance, along with NVIDIA (NVDA), will indicate if the market will correct or continue rising. We see initial support is roughly 0.68% below the market at 5524, with
primary tactical support at 5375-5363. A decline below 5363 would signal the start of an overdue correction.

Looking at the intermediate term, our strategic (quarterly) outlook has shifted to slightly negative, also indicating potential vulnerability to a corrective decline. The S&P 500 Small Cap is outperforming the S&P 1500, signaling a shift from Large Cap to Small Cap outperformance. Despite these developments, the major uptrend remains intact as long as the market
stays above the major strategic support at 4954-4819. The performance of key sectors like Financials, Utilities, and Technology, as well as the global strength of markets like Taiwan, South Korea, and India, will continue to be monitored for broader market trends.

While the market may experience some near-term consolidation and volatility, we view this as a healthy in preparing for a seasonally strong fourth quarter. This period will allow markets to absorb the current economic environment and corporate earnings, setting the stage for future advances. Importantly, we do not foresee any major systemic risks to the market at this time.