May 2024 Recap & Q2 Rebalance

 

May 2024 in Review

Hey everyone, and welcome back to this month’s market update. I hope all my fellow dads had a great Father’s Day and that everyone is enjoying the start of summer. I know this is coming out much later than we normally send them but I wanted to hold off until I did our Q2 portfolio rebalance, which we started on June 17th, so I could include those changes, and will cover at the end.

 

And as much fun as I have going over the rebalances, I enjoy the market updates even more when I get to share good market news with you about your accounts, which was once again the case for May, with the Dow, NASDAQ, and S&P all closing out May just shy of the all-time highs they set earlier that week. As has been the case for most of the past year, NVIDIA was once again one of the primary catalysts for the market momentum and became the third company to cross the $3 Trillion mark, joining Apple & Microsoft.

 

While markets routinely set high watermarks, many consumers feel the strain of 20%+ inflation over the past five years. This inflation, coupled with a cooling job market and fewer job openings, has begun to make investors skeptical about the future of this bull market, as well as the Fed’s continued delay of rate cuts, putting the soft landing back in question. Coming into the year, Wall Street was expecting anywhere from 3-6 rate cuts for the year, while we here at Traverse were only expecting 2-3 cuts, and revised our expectation to 1-2 back in March, and down to 1 in early May, with that cut expected to occur in Nov or Dec.

 

While the labor market has been tightening, unemployment is still under 4% and, while the 8.1m non-farm job openings is well below it’s 12.2m peak from March 2022, it’s still above the 10 yr average of 7.5m and well above the 5.6m average over the past 20 years. When you couple that with inflation stuck in the low 3% range, it’s no surprise that the Fed held rates steady at the June meeting last week and said to expect 1 rate cut late this year, aligning with our outlook.

 

Speaking of inflation, Target, Aldi, and Walmart announced they will be lowering the price on some everyday items. These announcements might have you believing that consumers will finally stop wincing in the checkout line but, even though consumer prices have gone up about 19 percent since 2021, grocery prices have jumped by about 25 percent over that same period, so we’ll see how much those price cuts help.

 

On the real estate front, housing inventory remained close to their lowest levels in 25 years as homeowner’s with 3% mortgage rates are reluctant to move, unless they are able to pay cash for a house. If you’re in that camp, keep in mind that as interest rates eventually come down, house prices will like start to rise again until there’s excess inventory, especially since we’ve continued to see home prices rise in this tight real estate market. In other words, if you’re thinking of moving, you might start with a higher mortgage initially, but will likely refinance down to lower rates 1-2 times in the next few years, which may cost you less than waiting for rates to come down and home prices to go up.

 

Overseas, the wars in Ukraine and Gaza rage on, with backlash against Netanyahu for his attack in civilian areas leading Biden to withhold some of the aid that was awarded to Israel, while Hamas continues dragging out ceasefire talks.

 

Not too far away, Iranian President Rasai died in a helicopter crash in mid-May, with elections for a new president slated for late June. While US-Iran relations have been all but non-existent during Rasai’s presidency, at least that was fairly predictable. What happens going forward is a big unknown.

 

Q2 Rebalance & Portfolio Adjustments

Moving on to our Q2 rebalance, here are the highlights:

  • Given the run that we’ve seen in the equity markets, with the vast majority coming from tech stocks, we brought our S&P index holdings back closer to target, while increasing our exposure to tech stocks slightly. That will allow us to continue taking advantage of the AI revolution, which we think is far from over. While they’ve gone up significantly, the difference between this and the .com bubble is that these companies are generating revenue and profits.
  • We closed our oil & gas fund, which was a very profitable trade across client accounts, and replaced it with a utilities fund, and increased the size of that allocation relative to what we had in the oil & gas fund. Utilities, which got hammered last year as interest rates rose, are trading below their historical averages and we expect them to perform very well as more companies adopt AI technologies. To put things in perspective, one of the studies I was reading said that an AI search uses 30x as much electricity as a google search. We also expect it to be largely unaffected by the results of the upcoming election.
  • The remaining portion that we pulled from the S&P indexes was reallocated to international stocks, which have slowly been recovering but are still undervalued. While we’re still underweight overseas as a whole, we see more opportunity overseas than in non-tech stocks in the US in the near term, and want to take advantage of that.
  • As for our bond sleeve, we significantly reduced all the existing bond funds we were using, except for the Guggenheim fund, and shifted the proceeds to an ultrashort bond fund that issues AAA collateralized loans at a variable loan rate. As previously mentioned, we are only expecting 1 rate cut this year, so we want to take advantage of the high, short-term interest rates while remaining nimble to reallocate to longer-term bonds once the Fed is ready to start their rate cutting cycle.

 

For those of you who’ve already had your Spring Review Meeting, you’ve seen that the changes we made this year, as well as those over the past 18 months have led to your accounts significantly outperforming the passive index benchmark for your accounts, even net of our advisory fees, and we expect these changes to add to that outperformance.

 

Before we wrap up, I wanted to take a moment to introduce the newest member of the Traverse team, Joel Houwer, who started at the beginning of June.

 

Joel was referred to us by one of our favorite clients, who worked with Joel for many years, and immediately referred him to us when I told her the type of person we were looking to hire.

 

Joel comes to us with over a decade of experience in the mortgage industry, covering a wide array of different roles, and will be running operations for Traverse, taking on some of the roles that both Devin and Cory were previously handling.

In tandem, Devin will be phasing out and moving on to a high-volume, multi-advisor firm where he can get significantly more experience working directly with clients than was available to him here at Traverse. This was something that Devin and I started planning for back in March, with Devin moving on at the end of June. If you have a chance before the end of the month, please reach out to Devin and wish him all the best in his endeavor.

 

And that’s it. Until next month, enjoy the summer weather and any trips you have planned and, if you need anything or want to discuss the portfolio changes in greater detail, don’t hesitate to reach out.

 

Laurence

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