Mid-Year Commentary: Navigating the Market

Summer is upon us, and with that comes graduation parties, family vacations, and BBQs with friends. It also marks the year’s midpoint, which is a good time to look around and see where we stand. Please feel free to share this with anyone in your world that would find it interesting.

We have some great things happening at GRWP!

Before we get into the markets, here are some quick notes on internal happenings.

We are pleased to report that Inc. Magazine has recognized GRWP as one of the best workplaces for 2024!  I think so, but glad I’m not alone in that opinion.  What has been great is that we value our team so much and when we talked to them about the recognition, it turns out it isn't about us at all. It's about the work we do for our clients and the passion we all share. 

Bobby’s podcast, Business Unchained, continues to release great episodes featuring fascinating guests and stories of successes, failures and their business-success mindsets. If you haven’t checked it out, it is worth a listen.  His podcast already has over 25,000 downloads, so again, I’m not alone in that opinion. You can check it out on Spotify, Apple, YouTube, Instagram or any of your other favorite platforms.

I also want to give a big shout out to our interns this summer, Kelly and Devan. They are doing a fantastic job, are super smart, and are even good at ping pong.  They fit in great with the team and we are thrilled to have them. As they say, birds of a feather flock together.

Lastly, Bobby and I are still relishing being recognized by a board of peers as 2024 NJBIZ Leaders in Finance.  As I wrote above, we love what we do. 

State of the Market:

As I sit and type this, the S&P 500 is up 17.4% this year!  After returning 26% in 2023, this is certainly shaping up to be a stronger year than many expected. Even with how optimistic we were entering 2024, we are surprised at not only the size of the move up, but also how tranquil it has been. Outside of a slight pullback in April, this market has marched almost straight up, having a positive return in the other five months.

Even if you live under a rock, I’m sure you have heard about Artificial Intelligence (AI) or had your hairdresser or barber ask you about Nvidia stock. If AI wasn’t part of your investment thesis this year, you are unlikely to feel much of the benefit of the rise in the S&P 500. Like 2023, the large-cap growth companies have been the driving force behind the rise.

To Do’s Before any Journey:

My family and I got away for a quick vacation recently. As we were heading for the airport, I turned to my wife and said, “traffic isn’t that bad!”  No sooner had I uttered the words, we found ourselves at a dead stop (I’m sure readers can relate!).  Luckily, my parents taught me to always leave three hours before a flight, so we still made it in plenty of time.

If we get down to it, most investors’ real concern with the market at this moment is a pullback, whether it be major or minor.  While we have been cruising for almost two years without traffic it feels like someone is going to say the fateful phrase “this market isn’t that bad!” and then, just like that, woosh!

Like a trip to the airport, a traffic jam shouldn’t be a major issue if we plan properly, leave ourselves time for a slowdown, and with some options to change routes if things get bad on the road. 

Since I love analogies, let’s see what a road trip looks like compared to a slowdown in the markets.

1. Plan properly:  When taking a drive, we check the GPS and plan our route. Smart investors do the same by planning their finances and figuring out the optimal path forward. If maxing our 401k and saving 10% of our income gets us comfortably to retirement in five years with mild traffic, then we shouldn’t worry about mild traffic.
2. Leave time for a slowdown:  Again, this goes with appropriate planning, but different routes tend to have different degrees of traffic. I might get stuck behind a tractor when visiting my sister in Vermont but, when we head to Long Island the city traffic could be a whole other animal. Knowing how your portfolio will react in different types of market environments is crucial to knowing how different slowdowns will affect your plan. Using scenario analysis, we can estimate this and build that into the plan.
3. Leave options to change routes: Sometimes I might take the slower route with more exit options if I am worried about traffic; we took the parkway instead of the turnpike for this exact reason. For markets, this translates to selecting investments that can be easily changed and don’t have hard lock ups, or what we in the business call “liquidity preference.” If you are worried about markets and the future of the economy, then now might not be the time to buy that piece of real estate or invest in that private equity fund which doesn’t have an exit ramp when you might want one. Preferring liquid investments that can be easily sold if things go awry can not only help avoid major slowdowns, but it can also help you rest your head knowing that you can always pivot.  If you do want to take the route that offers fewer options to pivot, make sure you are properly compensated by saving significant time on your journey: in markets, that would equate to those investments offering significantly higher returns than their more liquid counterparts.

Below are some slowdowns to watch for and a few “what ifs” we have heard from clients:

1. The economy weakens, dragging down the strong market. This is like your classic traffic slowdown; it will probably only add ten or fifteen minutes onto our trip. If the economy weakens, inflation will likely fall as well, and the Federal Reserve is more likely to cut interest rates. This will help us gain time on the back end. In this event, we should continue our path and look for opportunities to save time in the future.
2. The real estate market takes a dive and commercial real estate gets the punch in the nose we have been warned about for years. This might just be the classic slowdown from above, but if the commercial real estate market corrects in a sudden manner, it could come with a few fender benders in the slowdown. The question really comes down to how orderly it all is, and so far, any slowdowns have been controlled. We should keep cognizant that this risk exists and might cause more pain than #1.
3. The election causes havoc. We really don’t know what is going to happen in this election, and it seems to get more chaotic as it nears. Depending on the outcome, the market will react differently. I could see international developed markets responding poorly to a Trump victory as he threatens the tradition of NATO. However, the U.S. market may react positively at the thought of continued tax breaks by extending the current tax law into 2025.  I would expect a continuation of the same policies for Biden but starting from higher valuations and with the possible expiration of the tax cuts in 2025. International markets might respond more positively to a second Biden term as NATO will be under less pressure.
4. Global political instability spills over into more war. Most notably is the risk of China invading Taiwan.  That would be like a full blown 20 car pileup, especially since many of the highflyers of today’s market depend on semiconductors and continued technology investment.  Taiwan is the global epicenter for semiconductors, and until the CHIPS act brings manufacturing back to the U.S., this is probably the greatest risk to the market!
5. Inflation moves significantly higher from here. We see this as more unlikely, since leading inflation indicators point toward downward pressure, but it is a risk. This poses a unique threat since markets would clearly go down along with bonds, and it would likely look like a 2022 repeat. Additionally, the Federal Reserve could not cut rates and might even find themselves raising rates.  This type of scenario would cause a major reshuffling of our current positioning, but this should come with reasonable warning, so we hope and expect to have the time to make the appropriate changes if this comes to pass.

We will post some blogs on the website diving a bit deeper into the listed potential slowdown scenarios and things we are looking at. In the meantime, we hope people are enjoying friends, weather, kids back from school, kids at camp, and all that summer fun!  So, kick back, relax, and know we got you!

Jordan Kaufman

Chief Investment Officer

Green Ridge Wealth Planning