The second quarter of 2024 continued to be positive for most investors, adding to a strong first quarter. Economic growth, resilient corporate earnings, low unemployment, and slowing (albeit higher than normal) inflation remain the primary drivers of optimism among investors. U.S. stock markets continue to rise, and fixed income (bond) investments remain additive to portfolios.
The Fed held its last formal meeting on June 11th and 12th. The Fed continues to adjust its expectations for a potential rate cut later this year. While they expect to lower rates once (perhaps twice) this year, they continue to wait for further evidence that inflation is sufficiently falling before committing themselves to a rate cut. Regardless of the timing of a rate cut later this year or early next year, it’s unlikely short-term interest rates will change meaningfully in the next several months unless economic activity declines precipitously.
While we remain cautiously optimistic, retail/consumer spending is indeed slowing in some areas. Consumers have less savings and outstanding credit balances are more extended than over the past few years. On one hand, we should anticipate that tighter Fed policy (higher rates) will have its designed impact of slowing economic growth. So far, our economy has proven to be rather resilient. Inflation has subsided without a substantial move lower in economic activity. However, we know there can be a lag effect to Fed policy. We will be watching this closely in the coming weeks and months to determine if economic activity is indeed slowing. It’s certainly possible that the Fed may indeed orchestrate the so called “soft landing” – reducing inflation without damaging economic growth – but risks to the broader economy certainly remain.
Despite the overall progress across U.S. stock markets, growth stocks resumed their market dominance in the second quarter just as we were noticing a widening of the stock market rally earlier this year. The theme of artificial intelligence (AI) and implications for the largest technology companies in the world reasserted its dominance in the minds of investors. While we believe much of the enthusiasm surrounding AI is warranted, there is a certain amount of speculation taking place. Investors are willing to pay increasingly higher prices for the same stocks solely based on expectations about the future. This is not entirely unusual or irrational, given stock markets tend to always be forward-looking. Nonetheless, stock prices should also be tethered to reality and not simply the most optimistic view of the future. We continue to take a balanced approach to our stock market exposure. We certainly want to own many of the large technology companies likely to benefit from AI. But there are terrific companies and industries outside of technology that remain attractive with valuations more rooted in the present.
We also believe that diversification is likely to be more beneficial in the coming years than it has been over the past few. Proper diversification among asset classes such as stocks, bonds, and cash will remain most important relative to our client’s unique long-term goals. Additionally, we want to be adequately diversified across the different segments of both stock and bond markets. Regardless of the appropriate asset allocation between stocks, bonds, and cash, valuation always matters. Adhering to our investment philosophy and approach – sourcing high-quality investments at attractive valuations – will remain at the forefront of our investment decision-making process.
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About The Sanibel Captiva Trust Company
The Sanibel Captiva Trust Company of Sanibel, Florida and its divisions The Naples Trust Company and The Tampa Bay Trust Company; an independent firm with $4.5 billion in assets under management that provides Family Office and Wealth Management Services, including investment management, trust administration and financial counsel to high-net-worth individuals, families, businesses, foundations, and endowments. Founded in 2001 as a state-chartered independent trust company, the firm is focused on wealth management services that are absolute-return oriented and performance driven. Each portfolio is separately managed and customized specifically to the client’s yield and cash-flow requirements. Offices in Sanibel-Captiva, Fort Myers, Naples, Marco Island, Tampa, Belleair Bluffs, and Tarpon Springs. www.SanCapTrustCo.com
