Wright Financial Group, LLC

July 2024 Newsletter

AI Dominates Again in June as Focus on the Fed Intensifies

We’re midway through 2024 already, and the top stories behind the financial markets are the same ones that dominated all of 2023, namely artificial intelligence (AI) and the Federal Reserve. The AI boom continued pushing the stock market to new record highs in June, while speculation over when the Fed might start lowering interest rates in response to a progressively slowing economy weighed on other market sectors and sparked some volatility. Will the markets become more volatile in the second half of the year? And when will we see them become more balanced?

Before we tackle those questions, let’s take a closer look at June and where the markets stand after two fiscal quarters. All three of Wall Street’s most prominent market indexes ended last month with increases: the Dow Jones Industrial Average gained 1.2%, the S&P 500 was up 2.5%, and the tech-heavy NASDAQ added 6%. Year-to-date, the Dow is up by 4.7%, the S&P by 15.25% and the NASDAQ by 18.5%.1

Once again, though, most of that growth has been driven by speculative investing in the tech sector, specifically in companies developing new AI technologies. The so-called Magnificent Seven tech giants (Alphabet, Amazon, Apple, Microsoft, NVIDIA, Tesla, and Meta Platforms) have been dominating the markets since late 2022, while other stocks have lagged. Many fell further behind in June as new data revealed the economy is continuing to cool in virtually all key areas.2

The Fed Factor

Although the economy is still nowhere near a recession, the data increasingly shows it could be heading in that direction, which brings us to that other big driving force behind the markets, the Fed. Back in 2021, when inflation was first showing signs of spiking out of control, the Fed was criticized for not acting quickly enough to combat skyrocketing prices by raising short-term interest rates. Now, with the year-over-year inflation rate about one-and-a-half percentage points higher than the Fed’s target, some analysts are already criticizing the Central Bank for not moving faster to lower rates again to try to lessen the impact of a potential recession.

Coming into this year, Wall Street projected that the Fed would lower rates as many as six times in 2024. But a stream of data showing inflation was still problematic forced them to alter those projections. As of now, the Fed has only one small rate cut penciled in, and it’s not expected to occur until late in the year.3

Of course, that could change if the economic cooldown suddenly shows signs of getting dramatically worse. That possibility doesn’t seem too far-fetched when you consider that a classic recession warning sign is still in place: the inverted yield curve. With the Fed’s benchmark short-term rate at a range of 5.25-5.5% and long-term interest rates still lower, it means the yield curve is inverted and creating hardships for banks and other lending institutions.

Since the start of the year, long-term interest rates have mostly vacillated in a range between 4-5%. The interest rate on the 10-year-government bond peaked at 4.72% in late April. It started June at 4.50% and ended the month at about 4.40%.4

Whether the Fed doesn’t act until late this year or is forced to act sooner, falling interest rates will certainly be a welcome development for all investors. Cuts to short-term rates would likely prompt longterm rates to drop too, raising bond values, along with the values of all those stocks that have been trailing the Magnificent Seven. We would likely see a more balanced stock market, and probably less potential for volatility in a falling interest rate environment.

In the meantime, as investors continue keeping one eye on the Fed and another on the cooling economy, bouts of volatility may continue, and could even start spilling over more into the tech sector, affecting the AI boom. We saw a bit of this already in April, which was Wall Street’s only down month of the year so far.

Your Portfolios

Of course, none of this is new territory for our experienced portfolio managers. We’ve certainly been through far more challenging times, most notably just two years ago when the Fed was aggressively raising rates. This year is a whole different story, in fact, and as of now, we are still right on track with our performance goals, as you’ll see in your latest statement.

Most of you have most of your money in our bonds and bond-like instruments, and if that includes you, you should see your values up by about 0.25% on average for June, depending on your individual holdings. Year-to-date (once again depending on your specific holdings and how your portfolio is constructed) that puts you up by about 3.4%, and on a pace pro-rata for between 6-7% growth, which, again, is our target.

The even better news, of course, as I always point out, is that any jumps or drops in value are largely irrelevant because your income return remains the same.

Have a great July!

 

1 “Stocks Surged During the First Half of 2024. What’s Next?” CNN, July 1, 2024

2“US Economy Shows Further Signs of Slowing Under High Rates,” Bloomberg, June 27, 2024

3“Fed Keeps Rates Steady, Projecting One 0.25% Cut Later This Year,” US Bank, June 12, 2024

4 MarketWatch.com

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