Everyone wants to talk about handicaps these days. From sports betting to the stock market to international elections... And even our U.S. presidential candidates threw a few golf jabs around. Sadly, the fact checkers got it wrong – neither candidate is probably a 6 or 8 handicap. Although that is a discussion for another day.
This handicapping obsession stems from a desire to combat/profit from the current “unknowns” in the market/world. The world is constantly sharing a new “crisis.” Every day we have a new contagion factor just waiting to close the highways, kill the power grid, or something worse that requires all our attention for the nightly news cycle... Until the morning comes, and we forget that crisis as a fresh crisis has begun, and the modern TikTok cycle moves forward.
Social media has allowed for the greatest level of information dissemination in history. It connects people around the world, and it has done many great things for the modern economy. However, it has reduced attention spans to between 8 and 47 seconds. How can one solve such calamitous problems in 8 seconds? How can anyone plan with only an 8 second clip on retirement planning? How can you “get rich” in 8 seconds? If anyone has that answer, please let us know!
We must all look beyond the headlines, and we must all take more than 8 seconds to examine our lives daily, so that we may be reminded that there is a long-term plan in place. Uncertainty will always exist and in the short run it creates problems. But the solution to that uncertainty is to remain focused on the objectives in your personal life plan: the one-year, three-year, five-year, and ten-year+ goals. Those are the markers we are working towards, not the day-to-day changes. We do not let the 8 seconds define any life decision and markets have rewarded this long-term focus for many generations.
Although the news cycle is volatile, the markets have painted a very different picture in 2024. For example, bond market volatility tracked by the MOVE Index (measures expected future rate volatility among U.S. Treasuries) currently sits at 98. This marks the lowest levels on a 3-month basis since early 2022.[1]
[1] FCMS June 20th Big Number – 98 – Q2
We have seen over the last year interest rates settle between 4.2-4.5% on the 10 Year U.S. Treasury.[1] These rates have remained sticky, mirroring the stickiness of inflation. National average for 30-year mortgages remains between 6.44% and 7.06%.[2] Couple this with low housing inventory, steady annualized wage growth, and money market / CD savings rates at 4-5% on average, and you have a market picture with over 6 trillion dollars in cash sitting on the sidelines waiting for a longer-term home.[3] Assets in money funds as a percentage of long-term assets stands at 23% vs. in 2008 when that number rose to 63% of long-term assets.[4] This comparison fits with recent reductions in volatility and investors wanting dry powder to invest in opportunities while earning a decent return on cash (something that we have talked about a lot over the last 18 to 24 months.)
That idea of a decent return continues to push the discussion of what is the real return against inflation. U.S. Inflation over the last 12 months ending in June 2024 stands at just over 3.4%.[5] Yes, fixed assets have produced positive real returns of 1-2% over the last year to 18 months, and yes that is good for short-term funds that have more immediate objectives. But when we look at longer term goals and how markets can work towards achieving those goals we see the following chart.[6]
[1]US10Y: 4.289% +0.017 (+0.3979%) (cnbc.com)
[2]Bankrate.comNational Average
[5]Current US Inflation Rates: 2000-2024 (usinflationcalculator.com)
[6]S&P 500 Total Returns by Year Since 1926 (slickcharts.com)
The year to date gain on the S&P 500 is just over 17% in 2024. For 2023 you will notice returns at 26.29%. The Investment Committee remains longer duration and U.S. Equity focused – two decisions that have benefited our investment portfolios greatly. We also remain focused on technology and the Nasdaq to help fight against this persistent inflation long term. As long as gasoline and oil remain elevated, inflation will remain sticky at 3% even if the job market continues to cool off. Oil remains up over 13.8% as of June 28th.[1]
The DHT Investment Committee has also remained focused on the job openings number. That number has begun to slowly shrink, resting at 8.14 million job openings or 1.2 job openings per unemployed worker.[2] This number remains stable even as unemployment rates rise to 4%. What does this mean for the market? It means the economy has not lost its appetite for labor yet. Even with slower job creation the economy remains labor starved. It also points back to wage growth and the increased cost of labor. Although wage growth has slowed to 2021 levels it remains at or above inflation.
[1] Mohamed El-Erian – Monthly market returns for Major Asset Classes and Assets
[2]Us JOLTS Report May 2024: Job Openings Unexpectedly Rise - Bloomberg
The market has again taken this information to heart and added it to the FED’s current position of future rate cuts, potentially by year end. This remains a market support in the short run, and in the long run we have seen earnings already begin to strengthen this year. Q1 earnings growth hit 5.9% and they are expected to accelerate to 8.8% by the end of Q2 on a year-over-year pace.[1] This marries well with forward earnings forecasts for 2024 expecting roughly a 12% increase over last year.[2] Concerns over breadth and depth of the market strength remain debatable but communication services, healthcare, and information technology continue to lead the way.
The committee is focused on reducing market volatility through cash or money market reserves for immediate income needs. We remain committed to the DHT Income Planning strategies that operate over a 36-month cycle. We continue to harvest gains and refill income every 6 months. And, by harvesting gains and increased yields we continue to avoid short term volatility.
The market also remains poised for a growth cycle. We must always couch the distinction between the economy and the stock market. As rates come down – by market forces or by FED action – we will see a refinancing boom. Anyone who purchased a home between 2022-2024 will be eager to reduce their 7% rate. Anyone waiting to buy because they do not like or cannot afford a 7% rate will jump at the opportunity. And any major project sitting on the side lines making 4-5% on cash waiting to build a multi-billion-dollar development will be ready and eager to begin construction. So, from the economic side we see great opportunity.
Favorable policy outcomes over the next four years (such as extended tax cuts, lower rates, reduced debt spending, and better growth rates) along with cheaper input costs could lead to a strong growth cycle.
And, looking even further out we must consider the demographic impact on the current / future markets. Respected investor and Wall Street strategist Tom Lee is predicting the S&P at 15,000 by 2030. He is estimating double-digit growth annually from now on for several reasons: first, a potential labor shortage till 2035; second, FED action and accommodative monetary policy; and third, demographic comparisons of our population being between the age of 30-50 (Gen Z & Millennials leading the next growth phase, like the 1920s and the 1950s). [3][4] He also points out the impact of AI and the increased labor efficiency that will come from integrated services. This will result in reduced costs, higher corporate earnings, and affirm a realistic 5% annualized growth rate.
Tom Lee’s is not the only opinion of course, and not even he is saying we won't see bumps along the way. But if we do not take stock of the big picture, we can get lost in the 8 second fear clip and miss out on the next growth phase that makes retirement possible / sustainable.
This is why we regularly meet with you, our clients, and ask that you reach out when you have questions or concerns regarding your Personal Financial Plan. We are committed to ensuring that your plan is tracking with your financial goals. We want to affirm your income reserves and your risk windows, now and as you approach / enjoy retirement. We are actively seeking yields on cash and other secure assets. We are working within our dollar cost average strategies to put money to work in a systematic fashion avoiding as much short-term volatility as possible. And we remain focused on the long-term trends in this market.
Together we are building Testimony. Together we are committed to making your dreams into reality. Together we are focused on a brighter future!
[1]What To Watch As Second-Quarter 2024 Earnings Season Begins (forbes.com)
[2]What To Watch As Second-Quarter 2024 Earnings Season Begins (forbes.com)
[3]Fundstrat's Tom Lee Predicts S&P 500 Will Hit 15,000 By 2030 Driven By Gen Z And AI Wave | Markets Insider (businessinsider.com)
[4]The S&P 500 is headed for 15,000 by the end of the decade, says Tom Lee, who foresaw the 2023 rally (msn.com)
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