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Quarterly Review and Outlook: June 2024

"Glass Half Full?... Well, Maybe"

Loyd Johnson Photo

By Loyd Johnson, Chief Investment Officer
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A Look Back

The expression “glass half full” or “glass half empty” is a common phrase used to describe differing perspectives on a situation…one optimistic and one more pessimistic. The concept of optimism can be traced back to ancient Greek philosophy, when men like Aristotle and Epicurus emphasized positive thinking as a way to a happier life. The exact origin of the phrase is unclear, but it dates back to at least the early 20th century, reflecting the ongoing debate between optimists and pessimists. Ronald Reagan popularized the expression in a 1985 press conference saying, “you can say it’s like saying, is the glass half full or half empty?” My hunch is we all know friends and family members that fall into each camp, and maybe some even flow from camp to camp depending on the situation. I definitely tend to be more in the half full category, both in everyday life and when it comes to our financial markets. In life, because I think that the Greek philosophers had it right, and in the markets because there is substantial long-term data and evidence to support a positive outlook. The phrase has specific relevance now as we sit at or near all-time highs in most domestic stock indices. As we sift through a variety of economic indicators, the resulting forecast for the overall economy and the financial markets is open to interpretation and, really, how you view the information. For example, the latest June Jobs report was not as robust as in previous months. We added 206,000 jobs in the month versus expectations of 190,000, but April and May were both revised downward. Additionally, the overall unemployment rate ticked up to 4.1%, the third month in a row that the rate increased. The half full camp might point to that fact that jobs are still being added in a higher interest rate environment and the half empty camp points to the higher unemployment rate and the upward trend being worrisome. Perspective, and maybe some bias, does matter. The second quarter was especially good for large-cap domestic stocks, which has really been the case for the last four years, or since Covid. The S&P 500 was up over 15% in just six months, or over 5% more than the longer-term 12-month average. With that, the Bloomberg Aggregate returned 0.07% in the quarter, and 2.63% over the last year. U.S. small-cap, and International stocks, although still positive, trailed significantly. Commodities have been a strong asset class in 2024, as lingering inflationary pressures and some supply/demand issues aided overall returns in agricultural, energies and some precious metals. Glass half full, right?

The chart below shows the growth of $10,000 invested in the S&P 500 since 1970, or around 54 years. It also shows the most important economic, financial and human-interest events that have happened. Through it all, the $10,000 would have grown to $2,759,341 by the end of June 2024. That works out to an average annual return of 10.86%. The real importance of a chart like this is to show the resiliency of our financial markets over the long haul. What seemed like great stressors in the moment look more like smaller blips in the upward march of the large-stock index. In fact, if you were to draw a regression line through the data, it would look very much like and upward-sloping 45-degree line.


The next two charts look at first half of the year returns of the S&P 500 in election years. The first box then shows what happened in the second half of the year. In the 16 prior instances, the second half of the year showed positive returns. However, the second box shows what the max drawdown was in the second half. The largest such drawdown happened in 1948, and the average has been -7.25%. When you couple that with the fact that we have not had a 10% correction since October 27th 2023, the half empty folks could make their case for caution, while the half full people would say to just focus on the first box. Perspective really can be a funny thing…

The Asset Class Returns are updated as of June 30th. As the green box shows, large-cap domestic stocks continue to lead the way…and in a big way. In contrast, small-cap stocks are only up 1.7% in the first six months, after trailing the prior three calendar years. Although the white diversified asset allocation box shows a healthy 5.5% return for a half year, it is also interesting why it is not more. The fixed income box, which tends to be a substantial part of the overall allocation, was negative by 0.7%. Diversification works over time to dampen portfolio volatility and deliver better risk-adjusted returns. Just not so much lately.

A Look Forward

Even though I’ve already copped to being an unabashed half-full guy, it does not mean it is okay to have blinders on either. We have looked at some of the current positives, but there are also some troubling things hanging around in the shadows. Below, the purple line represents the amount of credit card or revolving debt that consumers have, while the green line shows the personal savings rate. I’ll just say that the alligator mouth that we see is not a great thing. We see how credit card debt went significantly lower and the savings rate skyrocketed as a result of the historical government response to Covid. From various subsidies and direct payments and extended, outsized unemployment benefits, cash was plentiful. As the Fed aggressively started raising short-term rates in 2022, both trends reversed. This level of debt is unsustainable in a healthy economy and it hurts the average family much more, with many making minimum payments to see their balances remain the same…especially with the average credit card interest rate well above 20%! It also means that the room for error, or the safety net, is tighter for most.

Below is an old-school, longer-term market valuation metric popularized by Warren Buffet. He always said it was one of his favorites in determining a fair valuation for the U.S. stock market. It is also very straightforward as it looks at the total value of the market over annualized GDP. Again, it is not meant to be a shorter-term indicator, but rather a simple look at the overall valuation of our stock markets. And, as we keep making new all-time highs, it has gotten stretched and is now higher than at any point in history, other than the end of 2021. Of course, we had a significant sell-off in 2022, which has been followed by the rally of the last 18 months. On a five year basis, the S&P 500 has delivered over 15% returns on an annualized basis, or nearly 50% more than the historic long-term average! To be fair, the indicator has been stretched for some time dating back to 2015-16 and investors would have missed more than 150% in returns from the S&P 500! 

Our last chart speaks to the overall breadth of the market rally..and it’s not great. The equal-weighted S&P 500 is only up 3.65% vs the 17.38% cap-weighted index. It means that a few of the big-name stocks like Nvidia, Apple, Meta, etc. are dominating the overall performance. More than half of U.S. stocks outside the S&P 500 are actually down this year, while over 40% in the index are negative. Again, owning the index has been a boon over the last several years and you never really know beforehand what the specific drivers are going to be, but you would ideally like a much fuller participation in the number of stocks advancing in a healthy market. The glass half-full camp could argue that means there are many stocks outside of the top five to ten that are more fairly valued. We believe that one of the important things we do for clients is to keep the long-term perspective and the integrity of asset allocation. In our markets, the glass is usually half full (S&P 500 positve 75% of the time in any one year)…but we also pay attention to potential risks and extended valuations. With that in mind, we have slightly reduced our stock allocation in favor of core bonds, which we believe can perform especially well in a rate-declining environment.

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