2nd QUARTER 2024 NEWSLETTER
Contributors
Summer is officially here and we hope you are enjoying everything this season has to offer. Of course, we are now entering what will likely be one of the most uncommon and historic Presidential election seasons of our lifetimes. With that reality presenting itself, there is much that my father, Jeffrey Vahanian, and I would like to share that is primarily about keeping our focus on how we are investing in this environment.
Equity Markets:
As you may well know, equity markets have had quite a run. It seems as though every day a different index reaches new highs, indicating a forward P/E ratio for the S&P above its 5-year and 10-year average. But it is the large-cap growth “Magnificent 7” technology stocks that have massively outperformed the rest of the equity markets. This narrow group of alpha generating companies is up approximately 30% year-to-date compared with the remaining companies only up around 5% (see the chart below). Much of this growth has been driven by AI oriented demand as well as strong earnings growth and rising forward guidance. In essence, corporate America is presenting an upbeat view of what lies ahead. Of course, as already stated, the advance in valuations has been narrow. But fundamentals continue to improve it will not be surprising to see a broadening of participation in any further market advance.
*Provided by J.P. Morgan
While we continue to be optimistic going into the second half of the year and believe a U.S. recession is off of the table (GDP growth remains positive), we believe it is paramount to also read the field for potential headwinds. As we have stated many times over, AI provides immense promise to transform businesses and productivity. However, if demand cools, for whatever reason, this development could prompt a knee-jerk reaction of selling. With this scenario in place on the heels of such a strong market advance, we continue holding to our belief in proper diversification and limiting over concentration in any particular company or sector of the market.
We also believe it is important to distinguish the difference between market performance and economic health. Equity markets move up and down as often as we buy groceries. But the health of our economy is based on more than equity markets. The two can often appear to contradict one another. That is why we continue to do our due-diligence across a range of economic factors that can impact long-term prospects and not just day-to-day price gyrations. In particular, with unemployment at a 50 year low, inflation now down to approximately 2.6% annually and a persistent economic expansion, the environment we are in is highly supportive of corporate profits. And profits, not politics, are the key driver of price valuations and investor enthusiasm.
Fixed Income Markets:
We continue to take advantage of higher yielding opportunities and even increased duration in bonds are rates appear more likely to stay level or come down moving forward. While inflation is still mildly higher than the Federal Reserve annual target of 2% the dramatic slowing of inflation is still another favorable factor in supporting manufacturing costs, likely lower interest rates, and less burden for the public consumer. With these facts in mind, we have increased our exposure to flexible bonds and areas such as emerging market debt, corporate high yield, thus taking advantage of current high interest rates which we see as being at their peak. Economic data is indicating that the market has already priced in a first Fed rate cut later in the year. We agree with this judgment and do expect rates to ultimately come down.
Geopolitics:
France’s President Macron recently had a snap election and shockingly to most observers, he and his more liberal contemporaries were more successful than had been anticipated. As a result, the far-right wing candidates did not win a majority in the French Parliament. Regardless of political views, maintaining a status-quo appears to have settled market nerves related to potential extreme policy changes. Additionally, war and conflict continue to pummel Ukraine and escalate the Russia-NATO conflict. Most reports suggest a diplomatic solution is unlikely until next year, if at all. Concurrently, the war in Gaza remains extremely complex and rife with humanitarian tragedy. This dysfunction and uncommonly uncertain view towards resolution has led us to maintain our underweighting of international investment exposure.
U.S. Election:
Some of you may be wondering what will happen to markets and your portfolio based upon the upcoming Presidential election. Such concerns are quite understandable. Not only is it hard to predict a winner, but equally challenging to anticipate what a reaction will be financially, politically, or socially. But none of these concerns are a secret. In fact, if there were no concerns, financial markets might very well be significantly higher. We must never lose sight of the fact that markets tend to climb a wall of worry and one of the healthy results of worry is caution… one of the very things that keeps market valuations in check. Of course, to whatever extent there is a worry, those concerns are being discussed, processed, and incorporated into the public domain every single day.
Just as we have done so in previous election years, we will continue to focus on your overall investment strategy, unique goals and time frames instead of using politics to overly influence short term investment decisions. We believe staying invested is the most important long-term strategy for investors.
As we continue to stay the course and focus on long-term goals and unique particulars, we are perpetually doing our homework and staying abreast of happenings around the world. We encourage you to reach out to us this summer if you would like to check in and discuss your portfolios or any changes to your own personal situation.
Have a great summer!
A look at a new technology that could change life as we know it,
Lifting markets higher and society through a new frontier!
