How to make the most money on your investments in the second half of 2024:
Just kidding.
Stock and bond markets are interesting, so I decided to start writing about them on a regular basis. In this post, which I intend to repeat quarterly, I may break down some metrics, recognize some trends, make some predictions, and/or point out how data can be misleading.
Most importantly, NONE OF IT is actionable for the reader. If you’re looking for a post to learn what trades you should make in your portfolio, this isn’t it (and I don't believe something like that really exists). But if you’re looking for some discourse about what’s currently happening in the economy and markets and a way to better understand it, that's my aim for this post.
Here’s my method - I’m going through the JP Morgan Guide to the Markets slides for 6/30/2024 and remarking on what stands out. You can find these yourself on JP Morgan’s website.
As you’re reading, if there’s something you’d like to know more about or that you don’t feel is particularly well-explained, please use my contact page to let me know! Otherwise, please enjoy.
Here’s the short version:
US stocks are at high valuations, but that’s not necessarily a good indicator of short-term returns (page 22).
The economy appears to be doing well - employment is still very low, and inflation has come down significantly - although higher prices are still tough to see (pages 23&27).
Although bonds have had a rough couple of years, they’ll likely continue to provide diversification and stabilization for portfolios in coming years (pages 40-41).
It’s possible we could see a long period of US underperformance, and diversifying with some international exposure could protect against that (pages 45-46).
Longer timeframes decrease an investors exposure to risk (page 65)
High CD rates can be tantalizing, but often bonds provide better returns when CD rates are high (page 67).
Digging in by page:
Page 4 of Guide to the Markets shows the P/E ratio (price to earnings) of the S&P 500 (500 largest stocks in the US) at inflection points throughout history - when the market either bottomed or topped. The first thing I’ll say about this chart is that the way it’s put together makes TODAY seem like an inflection point. That’s not necessarily true - in fact, it’s almost certainly not true. But it can give some reference as to what previous points looked like.
Page 16 is always a good reminder - the US stock market has been up 3/4 years since 1980, but that doesn’t mean that there hasn’t been volatility. Even in the positive years, drops of 10-15% are common. This is why stocks are a long-term investment.
Page 22 is always interesting to me: the relationship between consumer sentiment and the next 12 month return in the stock market. The next 12 months of returns tend to be higher when consumer sentiment is lowest, and lower when consumer sentiment is highest. Many have heard the quote from Warren Buffet to “be greedy when others are fearful.” I’ve often thought that this should be adjusted to: “be greedy when YOU are fearful.” If you’re not feeling good about markets, it might actually mean GOOD times are ahead. If you can remember, think back to how you felt in April of 2020 or June of 2022.
Page 23 shifts gears a bit to how the economy is doing - unemployment is one of the largest indicators of a recession. If people still have their jobs, they can make payments and spend money. That’s what makes the economy do well and stocks go up.
Page 27 has been a hot one for a couple of years now - INFLATION! I love this one because it breaks the CPI data down to different categories. You can see that “Shelter” is the one that takes up much of it - it’s important to know that the shelter component of CPI does lag, so it’s likely just starting its descent and will start to pull the overall number down.
Page 30 shows us the path of interest rates since the early ‘90s and the forward looking expectations of the Federal Open Market Committee (FOMC - the people who make the decision) as well as what the market expects. As you can see, everyone is expecting some rate cuts over the next couple of years. This could mean that your high yield savings account rate will decrease - if it’s not money that NEEDS to be in cash, you may want to ask yourself whether you should keep it there or move it before interest rates get cut. Bonds can help you lock in rates for a little longer.
Page 33 illustrates how bonds perform with changes in interest rates. Many know that when interest rates rise, bond prices decrease, and vice versa. But it’s different for different bonds. Importantly, this isn’t showing the impact of FED rate cuts or hikes, it’s showing the impact of interest rate moves for each specific bond. There’s a world in which the Fed cut’s interest rates by 1%, but the yield (rate) on the 10-year treasury doesn’t budge. In that case, you wouldn’t see any price movement in the 10-year treasury.
Page 34 shows us the yield curve at a few different points in the past few years. The yield curve has been inverted for quite some time now, meaning the shorter term bonds (left side of the chart) are paying more interest than the longer term bonds (right side). This has historically been a recession indicator, but there is quite a bit of discourse out there about the indicator being broken. That’s an important piece of markets - things work, until they don’t.
Page 40 mimics page 16 in showing us year by year returns for the US bond market along with the largest drawdown for each year. Bonds are positive almost every year, and volatility is much more muted. Bonds had their worst year ever in 2022, but importantly, this wasn’t because companies stopped paying their debts, it was because interest rates increased by 5% in a short period of time. Going back to page 33, you can understand why that would have such a negative impact, and it’s even worse when yields start lower. Now that yields are higher, the interest rate risk isn’t as significant.
Page 41 shows us that the starting yield for bonds tends to be a good indicator of the next 5 years of returns in bonds - the yield of the US Aggregate was 5% at the end of June, so we’d expect the next 5 years of returns to be about 5%.
Page 45 reminds us that the US stock market doesn’t ALWAYS perform better than international stocks, although it can certainly feel that way if you just consider the past 15 years. If the tide turns, it’s possible we’d see people pile into international stocks, which could provide a tailwind for international stocks and a headwind for US stocks. We just don’t know, so diversification is typically better.
Page 46 compares valuations of the US to international - and it seems out of whack. This is in part because of super high US valuations and a strong US dollar. If you like the idea of value stocks and high dividend yields, international stocks can provide both.
Page 65 shows us how the range of returns decreases over time in different investments. Bonds have a smaller range (less risk/return) and stocks have a higher range (more risk/return). But as you can see, the WORST return stocks have provided over any 20-year period since 1950 has been 6%. Not bad, right? If you have a long timeframe, it’s okay to take on some short-term volatility.
Page 67… CDs have been a big talking point lately. They’re higher than we’re used to, and that’s exciting with a potentially risk-free asset. But page 67 shows us that when CD rates have been high in the past, investors have always been better off in bonds. Now, this shows the US aggregate, which has some long-term bonds in it. But even investing in short-term bonds can achieve some of this effect. Ask yourself whether it’s money you need in the short-run. If not, there may be a better option than CDs. And if you do need it in the short-run, you may not want to lock it up in a CD.
Conclusion
While it’s a long list, it’s not all of my thoughts. If there are any points you want to discuss or disagree with, I’d love to hear it. Feel free to leave a comment below or reach out if you want to have a personal discussion.
As always, keep in mind that you don't have to go it alone. I’m Austin Preece, a financial planner in Eau Claire, Wisconsin, and I work virtually with people across the US. Check out my website to see what it's like to work with me and reach out if you have any questions.
If you found this post helpful, help spread the word! Share with friends and family that you think may benefit as well. But remember, this is solely for educational purposes - it's not advice.
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