2024 Mid-Year Review & Handicapping the Second Half

By Scott Colyer

As we approach the middle of 2024, it is appropriate to review the asset markets, what has done well and what has lagged.? We also want to look at developing trends that might give us some clues as to where the second half of the year could take us.?

Select Index Returns Year-to-date through May 28, 2024:

Nikkei 225 (local currency) +16.11%

S&P 500???????????????????????????????????????????????+11.88%

Hang Seng???????????????????????????????????????????+11.70%

Eurostoxx 50????????????????????????????????????????+11.63%

MSCI ACWI???????????????????????????????????????????+10.04%

ICE BofA US High Yield?????????????????????????+1.66%

Bloomberg US Aggregate Bond ??????????- 2.03%

S&P GSCI Capped Commodity??????????? +12.95%

Dow Jones Equity REIT ?????????????????????????- 6.80%

Source: Morningstar and Yahoo Finance. Total returns in USD unless otherwise noted.? REIT = Real Estate Investment Trust. Past performance does not guarantee future results.

So far in 2024 the global equity markets have continued to perform well with no signs of exhaustion for the bulls.? Other than a mini correction in April, markets have continued to move higher in defiance of significantly higher global interest rates engineered by world central banks.? Even stronger-for-longer inflation data has not deterred their march forward.

Asian markets are among the standouts at this point in the cycle.? Japan appears to have broken out of a 35-year hibernation/deflation era that plagued both asset prices and the Yen.? While it is true that the Yen has lost 50% of its value as compared to the US dollar, it has retraced much of its appreciation against world currencies during those 35 years.? We think that this market bottom (along with the rest of Asia, including China) is likely the beginning of a new bull market.? The Japanese Central Bank is widely thought to have ended its yield curve control and could soon begin to raise interest rates, which could help to further support the equity markets in the future.? Few people recall how prolific the Japanese markets were in the 1960s to 1980s.? We think this could be the beginning of another Japanese bull run that could last for years to come.?

Another standout year-to-date has been Europe, which had greatly lagged the U.S. markets for more than a decade.? Eurozone equity valuations are generally more reasonable than the in the US, and we believe have many years ahead to perform well.? The Eurozone economy and inflation has slowed over the past few months leading us to believe that the European Central Bank could be the first central bank to cut interest rates, which could act as a stimulus for further gains if inflation can remain subdued.

China is the second largest economy in the world.? It has suffered a significant economic slowdown in recent years partially due to their own actions that resulted in a significant overbuilding in the retail housing market.? Policy mistakes surrounding heavy handed regulation of their markets and trade difficulties with the west have also negatively impacted the economy.? The government has already stepped back market interference and has implemented significant monetary and fiscal easing.? This coupled with a newfound desire to invite punished investment capital back to their markets seems to be marking a bottom in China’s economic downturn.? Recent data shows a slow but marked improvement.? We believe the Hong Kong market (Hang Seng) appears poised for a significant rebound.?

We understand there are many naysayers about China and the risks inherent in investing in the country.? We acknowledge these risks and note that they are significant.? However, China knows they need a pathway to investment capital that can only come from the west, and in order to grow, we believe the Chinese government will embrace the west and the world.? Western countries are the biggest customers of Chinese produced goods and services.? In short, they need the west, and the west needs them.? The other big risk in China is the aging population and a real decrease in population growth because of their “one child” policy that was in force for years.? They have since reversed the “one child” policy.? Clearly there are risks and challenges to investing in China that are unique to China, however, given their ultimate need to grow the economy and continue to increase their standard of living, we anticipate they will be forced to continue to woo the Western nations. We think China could deliver outsized returns over the coming years.

Finally, we note commodities has been a stellar performer so far this year, and believe commodities has likely just begun its higher level of returns. The commodity markets are wide and very different.? The commodities index is made of metals, mining, materials, energy, and agriculture.? Over the past few months, we have begun to see many of the components of the commodities markets bullishly break out of their trading channels.? We pay heed to price as an indicator of demand and note that we are seeing this strength across the entire complex.? Of special note, the breakout of copper to new all-time highs is significant.? Copper has always been seen as a leading indicator of economic acceleration as well as slowing.? It has earned a nickname of Dr. Copper as its movement can diagnose a turn in the economy before other indicators.? Copper is used in many industries and tends to be a place where demand grows first.? Dr. Copper appears to be telling us to get ready for a growth cycle.?

Among the losers so far this year are bonds and real estate with the fortunes of both asset classes closely tied to interest rate movement.? Given the Federal Reserve’s (Fed’s) record hikes in interest rates we would expect these asset classes to lag.? Even though the Fed hiked rates a record 500 basis points, they were doing so to merely normalize rates to where they have been on a historic basis.? We are not big believers that the FED will reverse course and begin to cut interest rates prolifically.? We are believers that higher rates and persistent inflation pressures are here to stay for a while.? As interest rates stabilize at higher levels these industries will likely adapt and perform.? It is the abrupt and sizable change in rates that wreaked havoc on these companies and we anticipate they will adjust and should recover.

What could derail our goldilocks view of the economy and markets this year?? Well, even Goldilocks had her three bears.? Our three bears that could scrub a great second half of 2024 are the Fed, the debt and the spread of war.?

The first potential bear is the Fed talking about cutting rates well before any evidence that inflation is headed safely below their annual target of 2%.? The markets have baked in an economic soft landing.? If the landing is hard (i.e. high interest rates break the commercial property market or regional banks) then a recession could be our next chapter.?

The next bear is the bear bond market. Returns year to date are negative for broad fixed income indices.? Bond yield curves continue to be inverted with short rates higher than long dated rates.? This is the longest inversion ever recorded.? Inverted curves exist because the central bank raises short-dated rates above long dated rates to slow economic activity and thus demand.? Inverted curves have almost always ended in a recession.? History shows that only one in ten ends in a “soft landing”.? On top of the inverted curve, the Treasury has greatly ballooned their need to raise capital in the bond markets as fiscal spending as a percentage of gross domestic product (GDP) balloons to wartime levels.? All of this additional debt is being used to cover current spending needs.? Higher interest rates take up more of the government’s budget dollars and pushes us further into the deficit spending zone.?

Bear number three is the number of military armed conflicts that are being waged in Ukraine and the middle east.? The US is backing both wars with huge grants of money and weapons.? Wars can spread.? China has paired off with Russia and Iran to challenge NATO resolve.? If these conflicts blow up, then a potential market disruption will likely follow.?

We are not saying that these three bears will upend Goldilocks but if they do then our outlook will change.

All in all, we are comfortably optimistic about the growth of financial asset values for the balance of the year.? This is an election year.? Election years tend to be good years for the financial markets.? Fiscal stimulus continues to flow from Uncle Sam.? And history tells us that good years follow great years.? It is likely that the winners of the first half of 2024 could continue to perform for the balance of this year.?

CRN: 2024-0501-11659 R

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at?commentary-disclosures. For additional commentary or financial resources, please visit?www.aamlive.com.