While the beginning of the year was promising, US equities ended the first quarter near correction territory (defined as a decline of 10%). Market corrections are an inevitable part of investing and not uncommon, typically occurring about every 18 months. Given how market gains became concentrated in a handful of very expensive stocks, a correction was expected, especially with the prospect of heightened volatility following the new administration’s tariff policies.
Mega cap stocks, along with the growth-oriented companies associated with AI that carried the market higher over the last two years saw an outsized decline. The long-awaited participation by lower priced stocks and international markets was finally taking hold, right up until the upsized tariff announcement on April 2nd, which sent global stock markets into tailspin. The risk of the correction turning into a bear market (a 20% decline) increased significantly, especially when alarm bells in the bond markets sounded.
We experienced a temporary relief rally after the 90-day tariff pause was announced (which we attribute to upset credit markets), then uncertainty again took hold as investors digest how a possible trade war with China and other countries may play out.
The direction markets go from here directly hinges upon how trade policy ultimately settles. We view this as a 50/50 scenario – and therefore mostly uninvestable.
That does not mean that we have not taken action. Helping our clients achieve long-term financial success is a primary mission. We take action to avoid normal temporary downturns and corrections that could evolve into full-fledged bear markets. Learn more about how Integras Partners is navigating today’s markets.
Call us today to learn how we can help. 404-941-2800
Today, U.S. stocks are relatively concentrated. An investor in the S&P 500 is putting 40% of their money in the 10 largest companies. Historically, such concentration doesn’t work out well. The S&P 500 is also expensive. Such a concentrated and expensive market requires corporate earnings to continue growing unabated (to support the prices).
There is rarely economic certainty but until new government policy and the resulting economic impacts are understood, you should expect fairly big market swings. It’s been an unusually long time without a market correction (a 10% decline). One or more market corrections this year would not be surprising, so you should be thoughtful about how your portfolio is invested.
Market corrections can come and go in short order. More protracted declines take longer to develop and recover from. It isn’t so much the loss of value that has the most impact on your portfolio, and your well-being. It is the loss of time. Value will rebuild itself. The question is, do the growth assets in your portfolio have that time?
Integras Partners’ Time Horizon Investment Process can help. You can sustain your lifestyle with the money we set aside in Income Strategies, which provides the time needed for our Growth Strategies to capture the growth rewarded by volatile markets. You’re always welcome to speak with us about how we might guide you. The greatest value we can provide clients is the ability to not worry about money, and to go live life!
Call us today to learn how we can help. 404-941-2800
You’re on your financial journey and we can help people pave their own path. This quarter’s commentary blogs start with a recap of 2024 and our views of economic conditions. Then we share some of our ideas for timely investing. You’re always welcome to speak with us about how we might guide you.
2024 was a year of Artificial Intelligence and the biggest company stocks. Despite December weakness, the S&P 500 Index (a common barometer of the U.S. stock market) gained 25% for the year. However, most of this gain was isolated in the largest and most growth-oriented stocks (most of which are heavy into AI), which investors paid more and more for. Smaller companies showed some strength but faltered as concerns about Inflation prospects and continued economic growth kept coming up. Still, small cap stocks finished the year up 11%. Our robust gains were not shared by the rest of the world. And bonds provided a mild 1.3% return.
Our economy is growing at a healthy rate with low unemployment and inflation around 3%. This supports continued corporate earnings growth and possibly the quite high stock prices we have today. The near future appears primed for further growth as many U.S. consumers are getting raises, have little debt, lots of credit available and job security, all of which encourages more spending. While this all sounds supportive of another good year for markets, you must also consider risks to this view, specifically the relatively high stock prices and how further economic growth impacts inflation and interest rates.
The more an economy grows, the more demand there is for money, which increases long-term interest rates. Also, some policy initiatives voiced by the new administration (i.e. tariffs and deportation) are likely to result in higher costs for US companies. Regulatory reform and a more relaxed tax regime should boost earnings growth. Over the last 3 months, long-term interest rates have risen at almost the fastest pace ever because of these possibilities, and they could potentially go higher. Higher interest rates put downward pressure on stock prices, especially when they are already high.
August through October are historically the weakest and most volatile period for stocks and bonds alike. This year appears to be exceptional. Few expected the strength and resilience demonstrated by financial markets in the third quarter. The S&P 500 Index® posted a stellar 5.77% gain, posting year-to-date gains of 22%. Unlike recent years, the gain was not due to only a few large tech and communications stocks. We’re seeing overdue and much preferable broadening of stocks showing positive returns, and not just from the largest U.S. companies, but in small-caps and foreign markets as well.
The economy remains strong as the Fed begins its interest rate cutting cycle. Not too hot, and not too cold. Just like the story of a lost girl, everything is now “just right”. The Fed is done raising rates, employment strength continues, and economic growth is solid. These conditions amount to a “Goldilocks Scenario”, just about perfect to sustain corporate earnings growth and stock gains. Earnings growth should accrue to the value and small cap sectors, which until recently have lagged the large tech-dominated themes that were driving the market. At Integras Partners, we have been increasing our client allocations to these undervalued areas of the market for several months.
With lower relative prices, small-caps in particular should become even more attractive to investors, given that this Goldilocks scenario lasts for a while. We saw some confirmation of this in the third quarter as the lower P/E stocks began to outperform.
Integras Partners makes it easier to stay invested by actively managing client portfolios across our time-horizon strategies. We do this by keeping low-risk investments to provide for near term goals, allowing you more comfort with keeping longer-term investments intact through market swings. We can help you capture the long-term gains that volatile markets generate over time with less stress.
The S&P 500 Index® gained 15% in the first half of 2024. However, this gain was not as healthy as it appeared on the surface. The top 10 stocks represent more of the S&P than they have at any time in the last 25 years. Without the top 10 stocks, the remaining 490 names were up only 4%. We’ve written about performance disparities in several of our quarterly commentaries – large vs. small companies, growth vs. value, domestic vs. international. These types of disparities can’t last forever – either the rest of the market catches up or the top of the market cools down. We were happy to see some of the former this month, but we still find ourselves in a very concentrated market.
Many newer investors begin with index funds, such as those tracking the S&P 500. The S&P 500 is market-cap weighted, which means the largest companies in the index determine most of its performance. Today, the stock prices of these largest companies tend to move together – they are driven by similar factors such as enthusiasm over AI. So, a decline in one big name often drags the others down. Younger investors should think about broadening their investments (beyond the largest U.S. companies) to gain exposure to additional factors that tend to reward investors over time. Career Builders have the power of time on their side. Investing early in your career is always a good idea.
In addition to the issue of market concentration, there are beginning signs of a cooling economy. We can’t say that a recession is around the corner. U.S. economic growth continues, inflation is crawling lower, and consumer spending on services (travel, etc.) is strong. However, unemployment claims are rising. Broad consumer spending and housing sales are both slowing. Disinflationary forces are beginning to be felt and the earnings growth needed to support stock prices could become challenged. We advise Established Professionals to keep safer investments for money needed in the shorter term. But it is important to keep a long-term perspective for your retirement savings. Fear of the short-term and the emotional investment responses it can cause can be a major detriment to meeting your goal.
In a market trading at 24x earnings, some healthy caution is in order, but we’re not reducing stock exposure at this point. Despite the market’s concentration risks, overall corporate earnings should strengthen the remainder of this year and beyond. Over long periods, markets trend higher, even with downturns and corrections along the way. Our portfolios are structured to withstand these downturns, with money needed in earlier retirement years invested most conservatively.
There is still the question of how long interest rates will remain elevated. We expect to see inflation moderate, and the Fed lowering interest rates as early as September. This should allow capital-intensive businesses and commercial real estate borrowers to refinance at lower rates – feeding economic activity and supporting those smaller-cap stocks that have underperformed the largest companies.
This inflation cycle has played out much differently than past cycles.
The primary challenge in tackling stubborn inflation today is that the ultra-low rates of the past several years allowed companies to assume long-term debt very cheaply. The Fed’s Open Market Committee (FOMC) can only change the shortest-term interest rates, primarily impacting revolving and floating debt like credit cards and bank loans. The anticipated increase in corporate demand for financing at higher rates never materialized and delinquencies have been well-managed. So, the financial system has remained resilient and provided consumers with the confidence needed to continue spending.
Entering this cycle, consumers were also flush with spending power due to government stimulus, low fixed-rate mortgages, and lower-than-average debt service costs. So, Fed rate hikes haven’t impacted consumer behavior as much as in past cycles. Equally important, companies took advantage of robust demand by raising prices – further feeding inflation – and allowing them to protect or even increase profit margins while retaining their workforce. This self-reinforcing loop has allowed the economy to avoid recession and the stock market to recover faster than virtually every economic indicator – and our own fears – otherwise suggested.
Today we are in a momentum-led rally with the market assuming interest rate cuts later this year and a renaissance of capital spending on Artificial Intelligence over the next many years.
Momentum can carry a market a long way and we have enjoyed a period of market stability without suffering any meaningful pullback. This is rather surprising with 3 of the “Magnificent 7” having underperformed YTD, the Fed lowering projected rate cuts by half, and the past two months of inflation coming in higher than projected. The stock market has defied all but the rosiest of scenarios, with equity issuance (including IPO’s) at the highest level since 2021. This too shall change, but when it does it shouldn’t derail the bull market we are in. Volatility will return to test the conviction of investors. There will be some rougher sledding for us all at some point (it could be sooner rather than later).
Integras Partners strategies allow our clients’ stock exposure to be insulated by time. We don’t take meaningful market risk with money that our clients need soon. We don’t want them to change their spending decisions due to financial markets. Our objective has always been for our clients to enjoy life and leave the worrying to us.
