North River Wealth - 2Q 2024 Market Update

As the election season heats up and dominates the news, we recall a discussion with a company CEO during the previous presidential election cycle.

The CEO was extremely pessimistic about the market's prospects and, based on conversations with other CEOs, anticipated a significant downturn. As a result, he decided to shift his personal investments to cash ahead of the election. What happened? That November, many market indexes experienced some of their best months on record.

The takeaway?

Predicting market movements is incredibly difficult, and making drastic changes based on short-term predictions can jeopardize your long-term financial goals. Stay focused on your objectives and the factors within your control.

Market Returns

In the last three months, big U.S. companies, as tracked by the S&P 500, saw their stock prices go up over 4%, making their total gain for the year 15%. A big part of this growth, about one-third, came from just one company: Nvidia, whose stock price has surged about 150% this year! While tech stocks led the charge, energy and utility stocks also did well, but real estate stocks dragged the index down in the first half of the year.

Smaller U.S. companies, represented by the Russell 2000, had a tougher time. They faced the challenges of ongoing inflation and no changes from the Federal Reserve, causing their stock prices to drop over 3% for the quarter. Overall, they are just slightly up for the first half of 2024.

International markets stayed mostly flat. The MSCI EAFE, which includes stocks from developed countries in Europe and Asia, is still up about 5% for the year, thanks largely to strong performance in Japan. Emerging markets saw positive gains as the Chinese market started to slightly rebound. Emerging markets stocks rose over 5% this quarter, bringing their total gain for the year to over 7%.

Interest rates went up a bit, with the 10-year Treasury bond yield moving from 4.20% to 4.36%. The overall U.S. bond market is still down about 1% for the year.

Source:  J.P. Morgan Asset Management

Economic Backdrop

When you compare the 2010s to the current decade, it’s like looking at a completely different world.

In the 2010s, we were recovering from the financial crisis. Big banks were struggling because of problems with home mortgages. The Federal Reserve was focused on lowering unemployment, inflation was low, and interest rates were near zero.

In the 2020s, we started with a global pandemic that messed up supply chains and introduced a new way of working from anywhere. Big banks are now financially healthier, but we saw some regional banks close, and the commercial real estate market is facing huge uncertainties. Inflation is high, and so are interest rates—something almost no one expected a few years ago.

As we've mentioned in many posts, the market rally over the past year has been driven by just a few stocks like Nvidia, Apple, Microsoft, Meta, Alphabet, and Amazon. If interest rates go down, it could help other sectors and smaller companies that are more affected by the high interest rates we have now.

Even though inflation has been sticking around, the core personal consumption expenditure (PCE) measure, which is the Fed’s favorite way to track inflation, was up 2.6% over the past year. This matches what experts predicted and suggests that we might finally be getting inflation under control, which could bring more stability to financial markets.

Higher Interest Rates: Here to Stay

This year, the Federal Reserve has kept pretty quiet, keeping the Fed funds rate between 5.25% and 5.50%. While the market expects one or two rate cuts by the end of the year, significant decreases in interest rates are unlikely anytime soon.

It's time to accept that interest rates will probably stay higher for longer, especially compared to pre-COVID levels. On the plus side, consumers can get better returns on their cash savings if they find high-interest savings accounts or money market funds. However, higher rates also mean higher borrowing costs, making big purchases like homes more expensive than they were earlier this decade. Businesses that rely on borrowing also face higher costs, which can hurt their growth.

The housing market is particularly tricky right now. Supply is low because many people don’t want to give up their low-interest mortgages, and millennials are hesitant to buy with higher rates. Eventually, something will have to change. We think the housing market will slowly improve as people get used to the idea that higher rates are here to stay. Plus, if rates do go down, there's always the option to refinance.

US Election

The second quarter ended with the first presidential debate, where both sides questioned the electability of their opponent. National polls show a tight race, with Trump holding a slight lead over Biden in many surveys.

But since this is an investment blog, let's focus on the major issues concerning investors: taxes and market performance during election years.

The Tax Cuts and Jobs Act is set to expire at the end of 2025, meaning taxes for almost all Americans are expected to rise. If Trump is re-elected, it increases the chances of extending the current tax cuts and maintaining the corporate tax rate at 21%. If Biden wins, some parts of the current Act might be extended, but there’s a higher likelihood of increased taxes on wealthy Americans. However, we won't have much clarity on this until this time next year, regardless of the election outcome.

Market volatility often increases during election years, but it's important to remember that the S&P 500 is up over 15% so far this year. While who gets elected does matter, the current economic environment usually has a greater impact on market expectations and returns.

Historically, going back to 1928, there's been minimal difference between market performance in election years and non-election years.

We are not changing the positioning of client portfolios based on election predictions, and we don’t think you should either.

 S&P 500 average annual price returns, 1928-2023

 Sources: J.P. Morgan Bloomberg Finance L.P. as of December 31, 2023.

Authored by Stephen Blahovec and Michael Rausch of North River Wealth Advisors.  We are an independent, fee-only financial planning and investment management firm located in Pittsburgh, PA servicing clients locally and across the country.  To learn more, contact us here.

This content is developed by North River Wealth Advisors from sources believed to be providing accurate information. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.