2024 Second Quarterly Letter

By David K. MacLeod, CFA, CFP®

Stocks were mixed during the quarter, with the S&P 500 up 4%, led by tech stocks. The utilities sector has also posted remarkably good performance as investors expect strong electricity demand to power data centers for artificial intelligence (AI). Small company stocks were down 3% while international emerging markets gained 4%. Bond returns were positive as the 10-year U.S. Treasury yield remained at 4.3% and short-term interest rates were also unchanged.

Economic growth has been slowing this year, but a recession isn’t in the short-term outlook. Consumer spending has increased each month to new highs even as there are early signs that some consumers are experiencing financial stress. Early loan payment delinquencies are ticking a little higher for credit cards and auto loans. Investment spending has been resilient thanks to AI capital expenditures which have doubled in the past 3 years.

The ramp-up in AI investment hasn’t contributed much to productivity yet. But there is the potential for long-term productivity gains that could fuel years of higher GDP growth and a prolonged economic expansion. If that scenario plays out, AI could become ingrained in most large U.S. companies and would widely benefit companies in sectors beyond just the technology sector. In fact, we are underweight the high-flying technology stocks that have initially benefited from AI. Many of those companies look very overpriced on a price-to-sales and price-to-earnings basis, even considering above average business growth rates.

The stock market has been unusually calm lately, particularly in the month of June, despite uncertainty in global politics and the economic growth outlook. We caution investors not to trade based solely on 2024 U.S. presidential election forecasts. Although stocks tend to rise after uncertainty has passed, we wouldn’t be surprised to see higher market volatility in the second half of the year. We recommend maintaining a long-term investment approach that will stand through presidential elections every four years and through all phases of the economic cycle.

On a personal note, we are pleased to announce that our employee, Clarissa Hartono, earned the CFP® certification after passing the education, comprehensive exam, experience, and ethics requirements. Please say congratulations to Clarissa the next time you see her.

Please do not hesitate to call if you have questions or want to schedule a meeting.