July 2024 Monthly Review

A Look Back

The iconic rock song by the British band, Queen, and singer David Bowie was released in 1981. It quickly rose to #1 in the UK charts and reached the top ten in many other countries. The recording came about as a result of a chance meeting at a recording studio in Switzerland. The famous rift was developed first and the lyrics followed all in the same night.

On our annual trek to the Jersey shore, the song played at a local restaurant and resonated with me regarding our current markets/economy. The Fed has been under pressure to manage the short-term Fed Funds rate for the last two years. They took the bellwether indicator to zero during the initial Covid response and then reversed course to respond to a rapid rise in inflation, ultimately increasing rates to 5.25-5.50% currently.

Coming into 2024, expectations were that there would be five to six rate cuts as inflation came under control and signs of a still healthy, yet slowing economy came into focus. As of the end of July, there have been none. The first rate cut is now expected in September, and many are now wondering if the group charged with promoting maximum employment while keeping stable prices might have waited too long.

The S&P 500, after making over 20 new all-time highs this year, has come under its own pressure over the last couple of weeks. After not recording a 2% down day in well over a year, we’ve had two in the last several trading days. Further, we have not seen a 10% correction from a high since October of 2023. (although we are getting close now) The latest jobs report was released last week and showed the unemployment rate ticking up to 4.3% from 4.1% in the prior month, while 114,000 jobs were added, well short of expectations.

In the month of July, the big story was the rotation out of some of the high-flying technology names, and the re-emergence of Small-Cap stocks. The Russell 2000 delivered over 10% in the month, outpacing the S&P 500 by 9%! We talk often about outperformance leading to underperformance and vice versa in asset classes, but that is quite the move in one month by any measure. Core bonds seemed to have finally found their footing as anticipated rate decreases seem imminent. The Bloomberg Agg was up 2.34% in July, as many bond investors stand to benefit from the long-awaited rate-decreasing cycle. It is indeed a delicate dance that the Fed has been navigating in trying to cool things…but not so cool to fuel a recession.

A Look Ahead

For most of our client portfolios, we reduced our equity allocation in favor of core bonds over a month ago. We have talked about valuations for the Large-Cap S&P 500 being stretched. We’ve also written about the difficulty of the Fed’s overall mandate. As mentioned, they took rates low to spur investment…that led to increased inflation. They took rates higher to try to dampen growth and hopefully reduce inflation. It generally takes time to manifest in our fast-paced economy…and it did. Year-over year inflation has come down from a high of 9.2% to around 3% currently.

The difficulty stems in trying to get it just right, or the Goldilocks scenario (soft landing) where things are not too hot or cold. It worked in the children’s fable, but is much more difficult to manufacture in real life, and a multi-faceted global economy. We continue to believe that core bonds offer a strong risk-adjusted opportunity over the next couple of years. We also remind people that stocks, especially Large-Cap U.S. stocks, have been the place to be for years. It is not unusual at all to expect a breather and consolidation. Pressure can be a strange thing, and can lead to unwanted short-term results…and why patience is so important.