Below we will discuss the elephants in the economic room, market returns, consumer saving levels, inflation, mortgages, and the real estate market.
Market Returns
Global stocks slowed after their strong start to 2024, with the MSCI All Country World IMI Index returning 2.4% in the second quarter. Emerging markets led the pack, with the MSCI Emerging Markets IMI Index returning 5.1%, followed by the US as measured by the Russell 3000 at 3.2%, and finally developed ex US markets as measured by the MSCI World ex USA IMI Index at -0.7%. In the US, the Federal Reserve held interest rates steady but revised its outlook for rate cuts amid inflation concerns. Yet globally, as the inflation outlook improved, the Bank of Canada and the European Central Bank cut interest rates after several months of holding rates steady. IT stocks led the stock market gains, as NVIDIA, Apple, and Microsoft were the top contributors to global market returns.
Fueled by the market’s continued focus on AI, mega cap technology stocks drove positive performance within the US, with NVIDIA briefly surpassing Apple and Microsoft as the largest stock in the world by market capitalization. Communication Services was the next best performing sector, as stocks such as Alphabet and Meta also contributed positively to global market returns this quarter. Real Estate Investment Trusts (“REITs”) posted negative returns for the quarter, after falling in the first quarter as well. Globally, value stocks trailed growth stocks and small caps trailed large caps. Despite the underperformance of size and value, profitability was a bright spot in the premium environment, as stocks with higher profitability generally outperformed their lower profitability counterparts.
Consumer Savings
After the spike in savings during COVID-19 there has been a pullback. Jobs have been harder to find, and cash at home is getting tighter, as seen in my previous blog reviewing 90-day delinquent payments on credit cards, auto loans, and mortgages.
The Fed funds rate is at 5.38%, but the talking heads on CNN and the market are both pricing in interest rate declines. This could be a good sign for long-duration bonds. You can read more about how interest rates impact bond prices at “Bonds are More Volatile Than You Think”. However, the fear of inflation rearing its head has kept rates higher and likely won’t decline until something negative happens in the marketplace or cash starts to noticeably dry up. And as you can see in the chart below, cash doesn’t look like it’s drying up. There seems to be plenty of dry powder/cash to take advantage of any sales/market declines in the future.
Inflation
Inflation is coming back down to earth but still not at the 2% target the Fed wants. This likely means that we will be stuck at our current interest rate environment for a bit longer than we anticipated.
Although Inflation is persistent, interest rates are higher than expected, and homes are unattainable for most, it seems more income than expected is being spent on travel as a way to enjoy one’s dollars now that housing has been removed as an option for most.
Real Estate
With a spike in home starts in 2021/2022 most of these homes should be hitting the market in 2024/2025 and increase the housing supply, which will hopefully decrease some of the pent-up demand and prices.
Housing supply seems to be returning, prices are staying stagnant, if not growing slightly, and housing starts are still promising to bring more inventory to the market. Especially in booming cities with enough financial incentive to spur on home builders. Although mortgage rates are high, I don’t think lowering them is a great idea for housing prices as it will likely spur them to be artificially higher than they already are, and if we need to raise rates again, the unaffordability could be out of control.
With office vacancies on the rise, there are large tax incentives being offered to employers to keep employees in the office and this could be an area of creative housing solutions in the future.
Closing
Overall, the market still feels expensive, with a Shiller PE ratio of 36 and tech/growth stocks and funds increasing to higher and higher valuations, partially thanks to AI and Nvidia. If I had a lump sum to invest right now, although mathematically, it is better to invest a lump sum and not dollar cost average my way into the market, I would prefer to dollar cost average/invest my lump sum over time, and if there was a drop, I could accelerate the investment schedule. Historically it is an inefficient strategy, but with current valuations being high and the emotions behind investing so strong, dollar cost averaging can be a better approach for most people.
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