Second Quarter Newsletter
Responsible Guidance: Second Quarter 2024 Newsletter, July 2024
Dealing with the Unknown
Recently, during an internal Investment Committee meeting, we were discussing a market/economic update call from a large custodian that seemed to suggest that the risk for investing may be increasing. We found this interesting. We think investing risk is always the same, no matter what the environment. Why or how so? If you can identify a risk and you are genuinely concerned about that risk, you can plan for it. The true risks to investing are the unknowns. The things that occur that you had no time or ability to plan for. As you are reading this, your mind might start imagining painful or negative investment environments. Humans tend to have a greater fear of losing than expected pleasure from winning. But you should also be imagining positive or upside surprises as well.
As a Registered Investment Adviser, Baron Financial Group is held to high ethical and fiduciary standards and required to put the interests of our clients ahead of our own. Combining the standards we are held to with the services we offer, we have to be careful not to provide any misleading statements or guarantees, especially related to investment performance.
Given that investment performance is truly unknown, we work with clients to develop customized diversified strategies that give a range of outcomes. We discuss what to do when different scenarios occur, versus planning for a single outcome. That way there is a plan in place for when an event occurs, versus trying to guess if it will occur. The planning does not stop there, as regular reviews and updates are needed to keep the range of possible future outcomes relevant.
As you read the economic and market performance data below, you may notice mixed results. Of course this is past performance data that is known. If you went back to the start of the year, would the performances of the indexes be within a range of future expectations? Think about where performances may go from here. It is good to have a plan for the downside, but remember the upside is also possible.
Finally, look at the Your Personal EconomySM section below, where we discuss planning for upcoming situations with unknown outcomes that are outside of investing.
A Global Perspective
A core objective for our customized Baron Financial Group investment strategies is global diversification. Global diversification means including investments based both domestically in the U.S., as well as internationally in developed and developing countries. There are popular benchmark indexes that provide perspectives about the performance of global investments.
For equities, we monitor the MSCI ACWI All Cap Index. This index represents stock investments across 23 developed and 24 emerging markets. The index was up 2.34% in the second quarter, improving year-to-date (YTD) performance to up 10.20%. Concerns about inflation and interest rates weakened, creating opportunities for stocks to advance. Geopolitical risks remain but were not enough to deter performance. After having a solid first quarter in 2024, the index has now been positive for three consecutive quarters.
For fixed income, or bonds, we track the FTSE World Government Bond Index. The index tracks sovereign debt from 20 countries, denominated in their respective currencies. The index was down -1.58% in the second quarter, driving YTD performance lower to -3.96%. Though concerns about inflation and interest rates were waning, rates were not immediately adjusting.
U.S. Economy
Job creation continues but is not keeping up with those looking for a job as the unemployment rate rose. Recent inflation data appears favorable. The Federal Reserve (Fed) indicated they may not need to wait for inflation to fully reach its target before beginning to cut rates. For now, economic growth and job growth continue, keeping fears of an immediate recession at bay.
The Bureau of Economic Analysis (BEA) announced in its third estimate for the first quarter of 2024 that real Gross Domestic Product (GDP) increased at an annual rate of 1.4%. Though positive, it was a slowdown from the 3.4% reported for the fourth quarter of 2023 (the full press release can be found at https://www.bea.gov). This was the seventh quarter in a row of positive economic growth.
Due to the normal delay in receiving growth data from the BEA, the Federal Reserve Bank of Atlanta publishes a “nowcast” by estimating GDP growth for the most recent quarter (in this case the second quarter of 2024) using an approach like the BEA. On July 15, 2024, the estimate for second quarter GDP from the Federal Reserve Bank of Atlanta was positive 2.5%. Note that this estimate updates regularly and is subject to change. The “nowcast,” along with the methodology, and additional information can be found at: https://www.atlantafed.org/cqer/research/gdpnow
Job growth continues, but the unemployment rate has been climbing. According to the Bureau of Labor Statistics (BLS), the U.S. gained 206,000 jobs for the month of June, but the unemployment rate moved above 4%, coming in at 4.1% BLS indicated job growth was notable in government, health care, social assistance, and construction (full press release can be found at: https://www.bls.gov).
U.S. Stocks
The S&P 500, an index consisting of roughly 500 of the largest U.S. domestic stocks, continued to perform positively, up 4.28% in the second quarter driving YTD performance to 15.29%. Following last year’s performance, it continues to remain the best performing index in our newsletter this year. Technology, Communication Services, and Financials were some of the top performing sectors in the index so far this year.
For technical analysts and trend followers, the index dipped below the 50-Day moving average in mid-April but was back above by early May. The index remained above the 200-Day moving average for the entire quarter.
Dividing index components into growth and value, growth-focused stocks continue to outperform in the second quarter of 2024, as they did in the first quarter and for all of 2023. Value did outperform in 2022, when most equity indexes were struggling.
International Stocks
International-developed-country stocks (such as those in the European Union), measured by the MSCI EAFE index, were down slightly at -0.42% for the second quarter. YTD performance remained positive, though, up 5.34%. Non-developed, or emerging country stocks, measured by the MSCI EM index, were up 5.0% in the second quarter (best performance for the quarter of the indexes we cover in the newsletter) helping improve YTD performance to 7.49%.
Though emerging-country stocks had a solid quarter, both emerging market and international- developed stocks outside the U.S. lagged the S&P 500 YTD. The last time international stocks outperformed U.S stocks was 2022, and then 2017 prior to that.
Bonds
U.S. Domestic Fixed Income (bonds), as measured by the Barclays U.S. Aggregate Bond Index, was flat, up 0.07% in the second quarter. YTD the index is down less than 1%. The index gauges the performance of investment-grade intermediate bonds. With reports of inflation moderating, bond investors are contemplating the Fed’s next move.
The 10-year U.S. Treasury bond yield was higher at the end of the first quarter versus the beginning of the year. On June 28th (last business day of the quarter) the rate was 4.36% compared to 3.88% when it started the year.
If you plot interest rates versus the time-to-maturity to earn those rates, you have created a yield curve. We continue to monitor the changing shape of the yield curve for U.S. debt issues, and what that may signal. Using the U.S. Government 2-year bond rate as a proxy for short-term rates and the 10-year U.S. Government bond rate as a proxy for long-term rates, we calculate the difference between the rates, which provides a possible indicator for the future direction of the economy. A steep spread (long-term rates higher than short-term rates) indicates potential future economic expansion, and fixed-income investors are compensated for taking longer-term risk. A flat spread (long-term rates match short-term rates) is a possible indicator of economic uncertainty, and longer-term investors are not being compensated for investing in longer-dated securities. An inverted spread (short-term rates are higher than long-term rates) possibly indicates future economic contraction.
At the end of 2024’s second quarter, the 2-year was 4.71% (and 10-year 4.36% per above) keeping the yield curve inverted by 35 basis points (a basis point represents 1/100 of 1%). As a point of reference, the yield curve has been inverted since the third quarter of 2022, just after the Fed started raising rates in March of 2022 to fight inflation.
The yield curve steepened slightly in the second quarter after having a similar movement in the first quarter. If the economy continues to grow and if inflation continues to slow, the slight steepening in recent quarters may indicate investors are thinking about a growing economy and higher rates for longer.
Housing and Real Estate
Commercial real estate, as measured by the FTSE NAREIT All Equity REIT (Real Estate Investment Trust) Index, was down less than 1% in the second quarter and is down -2.19% YTD. The index struggled at the start of the year, but has recently posted positive monthly results, improving the quarterly and YTD data.
According to Freddie Mac (FM), the average 30-year residential home mortgage rate increased slightly to 6.89% (as of 7/11/2024). During the past 52 weeks, the rate has been between 6.6% and 7.79%.
Natural Resources
The Bloomberg Commodity Index continued to advance in the second quarter, up 2.89%. YTD the index is up over 5% as the costs of commodities and raw materials increased. Oil, cattle, and copper have seen appreciation in prices through the first half of the year. Agriculture products, such as corn and soybeans, as well as natural gas have been detractors.
Baron Client Strategies
Planning for multiple outcomes with Your Personal EconomySM is critical to helping our clients answer the simple question "Am I going to be OK?".
As clients know, we are Registered Investment Advisors (Fiduciaries) and we operate as fee-only advisors, so we do not receive a commission for making investment transactions. A big reason your Baron team makes trades is to align clients' portfolios with their customized, risk-appropriate globally-diversified strategy. Also, we believe the actions we take are potentially strengthening the clients' portfolios or financial positions. We use this same approach with our own personal money.
No matter the economic environment, our basic principles remain:
Create a globally-diversified and risk-appropriate strategy. Validate the investment choices versus peer investments. Rebalance when needed. Test the strategy in a comprehensive financial plan and obtain regular feedback to update information and advance your financial position.
Your Service Plan
One of our primary roles is to educate our clients to make informed decisions about reaching their goals. Critical to that process are plan reviews, a process that focuses our attention on your goals, takes account of any changes in your situation and allows us to alter the course, as necessary. If you have had any changes to your financial position or are considering changing financial goals and objectives, please let us know.
Your Personal Economysm
You may have heard us say that we are happy to help clients with issues outside of investing that may have an impact on their financial lives. We say things like “Lean on us when you are making a decision with anything with a dollar sign involved.” So, we have been including this section as a reminder of all our services and to share ways in which we can help clients outside of investing. You may remember back in 2018 new federal tax laws went into effect with the Tax Cuts and Jobs Act (TCJA). Those rates remain in place today but are set to sunset at the end of 2025. Without action from Congress, rates for items like ordinary income, capital gains and estate settlements will revert to pre TCJA levels. This will most likely mean higher tax rates. The situation itself creates many unknowns. With the upcoming Presidential election, the candidates are signaling very different approaches related to taxes. Also, the position Congress takes and its ability to act all the way up until the final days of 2025, leaves a lot of room for unknowns in planning. Since everyone’s Personal EconomySM is unique, we recommend starting conversations with your Baron Team, your tax professional, and your estate attorney. You will want to review your income plan and determine any flexibility you have in controlling income over the next several years, such as if a Roth conversion makes sense or you have an inherited IRA and how and when to take distributions. Also, you will want to start to consider possible impacts regarding your estate plan. These are only a few of the issues to consider. Remember it’s never too early to start planning for events related to Your Personal EconomySM. As always, it is important to share updates on your financial lives with us. If you would like to expand resources available to you or just update us on recent changes, please reach out to us to discuss Your Personal EconomySM. |
Concluding Comments
Dealing with unknowns can be challenging whether they are related to investing, tax planning or life in general. Keep in mind that considering a range of outcomes and having a plan for what to do in the event a different outcome occurs can help relieve stress related to uncertainty. Also, know that humans are prone to over-emphasize downside scenarios. So, you need to remember to factor in positive surprises as well.
If you feel overwhelmed, concerned, or just need some help planning for the unknowns in Your Personal EconomySM reach out to us, we can help.
Baron Updates
Save the date for our next client appreciation event, Casino Night 2024, in New Jersey – October 10, 2024. Please note that the date has changed since our last quarterly newsletter in April. Look for our email soon with details on the event. We hope to see many of you there!
Continue to look for educational and Baron-related posts on our website blog. The Baron Advisors are often called upon by journalists for their insights on financial planning and investing. In addition, we like to share with you any news about your Baron Team. Recently, James Suazo joined the board of directors for The Scholarship Fund for Inner-city Children (SIFC). You can read more about that here.
If you are new to Baron, you may not know that we offer our own scholarship annually, the Baron Financial Group Scholarship, awarded to two deserving Fair Lawn High School graduates, continuing their education in a business program. This is our 14th consecutive year. You can read more about the 2024 scholarship recipients on our blog.
Remember that you can also visit our website to gain access to your client portal. Just click on the client-portal tab, which will allow you to view your account information. The client login requires a username and password to gain access to the portal. Please let us know if you would like to create your portal login or if you would like to learn more about what the portal provides, including paperless statements. Contact Baron at 1-866-333-6659 or at info@baron-financial.com to enroll.
We hope you are staying cool and enjoying your summer! We look forward to seeing our clients and friends on October 10th!
Warmest Regards,
Baron Financial Group, LLC
www.baron-financial.com
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of July 17, 2024, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Baron Financial Group to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client or prospective client’s investment portfolio. Historical performance results for investment indices and/or categories generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. Inclusion of index information is not intended to suggest that its performance is equivalent or similar to that of the historical investments whose returns are presented or that investment with our firm is an absolute alternative to investments in the index (if such investment were possible). Investors should be aware that the referenced benchmark funds may have a different composition, volatility, risk, investment philosophy, holding times, and/or other investment-related factors that may affect the benchmark funds’ ultimate performance results. Therefore, an investor’s individual results may vary significantly from the benchmark’s performance.