The Cushion of the Sea – June 2024 Commentary

A number of years ago, a submarine being tested was submerged for several hours.  Upon returning to the harbor, the captain was asked, “How did that terrible storm last night affect you?”  Surprised, the captain exclaimed, “Storm?  We didn’t even know there was one!”  The submarine was so far beneath the surface that it reached what sailors refer to as “the cushion of the sea” – a depth in the ocean where the waters below are never stirred despite commotion on the surface.  While not possible to duplicate with investments, we try to “slowdown” the oft-fast paced world of “do-anything, go-everywhere, get-it-done” that creates undue stress in life.  Can we deliver financial peace of mind allowing one to remain calm within “the cushion of the sea?”  The proven way is through a disciplined & repeatable process – “buckets of time” and LIVING LIFE financial planning.  We offer several ideas to highlight important themes for investors to consider approaching the mid-point of 2024 – providing comfort in “the cushion of the sea.”

  • Dow 40,000! It was over 20 years ago in March 1999 when the Dow first surpassed 10,000. That’s an incredible investment message about the power of time in the market!!  Yet it is easy to feel concern about current “frothy” market valuations.  Recall, the late-90s where technology stocks were soaring; a tech bubble developed into “irrational exuberance”.  Today, similarities exist – the Internet held huge potential to transform commerce and business efficiency which is the similar idea behind artificial intelligence today.  But there are some big differences
  •  between the periods as well.   For example, the US ran budget surpluses in the ‘90s and the price of oil was just $11/barrel.  But a more comprehensive checklist of data observed near prior market peaks suggests a major market top is not present (reference chart below).
  • Market Concentration on the Rise Again: The market advance in May looks different than the last 6 months; participation seems to be narrowing again – an unattractive condition that suggests waning conviction in the broader economy. The top 5 companies in the S&P500 swelled to 27% of the index in May to the highest level of concentration in 44-years of available data. Four stocks (NVDA, MSFT, AAPL, GOOG) added more market value than the rest of the S&P500 combined. While the S&P500 is up 10% YTD, 45% of stocks in the index are in the red.  Similar to 2023, portfolios pursuing value and diversification lag the mega-cap driven S&P500.
  • Bonds Down, Not Out: While bonds are yet to fully recover losses endured in 2022 – amid elevated inflation and the fastest rate-hiking campaign in 40 years – yields are again at historically normal levels. Bonds are an important ingredient in portfolio construction and risk management. Be careful: bond funds can look uninspiring in a portfolio because the current market value may be less than the original cost basis.  While total return for bond incorporates both interest earnings and price change, interest is the biggest component of bond returns over time.
    • When investors buy newly issued Government debt, money is pulled out of “circulation” that could otherwise be used to purchase goods or invest in other assets. Monitoring treasury auctions in recent month indicates a weakening appetite (soft demand) of investors to buy US government debt.  This puts upward pressure on all interest rates, and often causes other financial markets to struggle. Treasury issuance during the summer and during the upcoming presidential election season could keep market action variable and uncertain.
    • Bitcoin, Meme Stocks, and Junk Bonds, OH MY! More speculative assets like these can be a helpful barometer; they provide a good short-term indicator to expanding/contracting market liquidity.  Perhaps not surprisingly, speculative assets enjoyed a big jump in early-May.
  • Government Debt Is Affecting Market Liquidity: When the US Government is actively issuing new debt, market liquidity decreases in the short-term and puts pressure on financial assets like stocks and bonds. This may seem counter-intuitive (like steering left to go right when a car is skidding sideways in snowy conditions).
  • “Higher for Longer”, or just “Normal for Longer”? Inflation-related data caught a break in May after several months of disappointing readings. This helped soften Fed comments about future monetary policy.  Market participants appear to be subscribing to the view that rates will not come down as much as previously anticipated.  While this may be disappointing to those longing for the days of near-zero rates, current rates are now normal by historical standards; it was ultra-low rates that were abnormal.  We continue to believe that rates will remain “normal” (higher) for longer.
  • Political Noise Shifts into High-Gear: In every Presidential re-election since the early 1940s, stock performance was positive because incumbents spend to “goose” the economy to improve voter attitudes before election day. The 2024 election season appears more polarizing and crazy than any in recent memory and head toward the first Presidential debate later this month.  Political-related focus seems certain to increase from here.

Taken together, the numerous crosscurrents suggest choppy seas are likely as we move through 2024.  Client portfolios utilize a diversified core of investments focused on companies with quality balance sheets and are emphasizing reasonable valuations; the core beneath the surface is intentional and strategic, and will benefit if/as earnings broaden as occurred in the late-90s.  The Dow achieving 40,000 in recent weeks is simple evidence that time is your greatest ally to long-term success.  Utilizing a disciplined & repeatable process will keep us firmly in the cushion of the sea.

Steve Henderly, CFA | Nvest Wealth Strategies®

Printer Friendly PDF: June 2024 Commentary

Despite recent market strength and new all-time highs, no indication of a bull market top.

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