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June 22, 2024 Market Update

The S&P 500 Index and the Nasdaq took a breather after posting fresh record highs earlier during the shortened trading week ending Friday, June 21st, as signs have begun to appear that the artificial intelligence-fueled rally may be losing some steam.  Meanwhile the Dow Jones Industrial Average, which has a smaller allocation to tech stocks, posted a 1.45% gain.

Weaker than expected retail sales numbers resulted in a volatile week for bonds as the market re-adjusted its expectations for the anticipated Fed rate cut.  A small uptick in treasury rates during the week led the U.S. bond market to pull back slightly, with Vanguard Total Bond Market ETF (BND), a proxy for investment-grade corporate and government fixed-income securities, dropping by a modest 0.19%.

In a speech last Tuesday, Federal Reserve Governor Adriana Kugler provided the following four reasons she expects inflation to improve, according to the Wall Street Journal.  

  • Consumers appear to have become choosier shoppers, limiting the ability of businesses to pass along higher prices.
  • Businesses are facing slower growth in costs, including less pressure from higher wages as labor-market conditions return to normal.
  • Productivity growth, or output per hour worked, appears to be picking up, potentially reflecting the gains of higher business-startup rates.
  • Higher interest rates are slowing economic activity and hiring.

If Governor Kugler is correct, it would likely mean the Federal Reserve will cut rates twice before the end of the year.

On another note, the high valuations at which stocks are currently trading, combined with the improved outlook for bonds, suggest that it may soon be a good time to modestly lower equity exposure.  Here are two ways to do so:

Rebalance Your Investment Portfolio:

High stock valuations may mean that your investment in stocks is overweighted and your allocation to bonds is underweighted.  Rebalancing your portfolio would involve selling equities and reinvesting the proceeds in bonds to achieve your target allocation.  We plan to conduct a similar rebalance in our client portfolios during the first week of July.

Discontinue Reinvesting Dividends and Interest:

Instead of reinvesting dividends and interest, consider depositing them in a cash-like account for the time being.  This will create a cash reserve that can be used to buy stocks at lower prices if the stock market declines.  We have already implemented this idea in our clients’ accounts.

That’s all for now.  Have a great weekend and invest wisely my friends.