Market and Economic Review

By Bill Hansen, CFA®, CMT, Co-Chief Investment Officer, Principal

Equity Markets

Source: YCharts

In the first half of the year, U.S. stocks extended a bull market, with the S&P 500 reaching a series of record highs, led by technology and communications services stocks. Year to date, U.S. stocks continued to lead foreign markets and real estate.

The second quarter of 2024 was similar to the first in a couple of ways:

• Large U.S. companies performed better than small U.S. companies.
• Growth companies (in particular large growth) outperformed value companies.

One difference we saw in the second quarter was that emerging international stocks outperformed developed international as well as U.S. stocks (more thoughts on that below).
U.S. stocks also led international stocks over the past 12 months, but other markets showed respectable 10%+ total returns¹.

Fixed Income Markets

Source: YCharts

During the quarter, the Federal Reserve (Fed) continued to hold the overnight federal funds rate steady at 5.25%, while the European Central Bank lowered its record-high deposit rate by 25 basis points to 3.75%, for the first time since 2019.

U.S. aggregate and municipal bond returns were relatively flat for the quarter, along with global bond returns which were down slightly and have underperformed year to date. Over the past 12 months, all these types of bonds have had slightly positive total returns (see table above).

The 4.36% yield on the benchmark 10-year U.S. Treasury bond² is down from the recent high in October 2023 but remains higher than it has been over most of the past decade.³ With current inflation readings in the 3% range, investors can now earn a slightly positive return after considering inflation on many fixed-income investments.

Economic Indicators

The labor market remains healthy, with non-farm payrolls averaging gains of about +220,000 per month over the past 6 months, including all available revisions, compared with a 6-month average of about 207,000 in January of this year. The unemployment rate (U3) increased slightly from 3.7% at year-end 2023 to 4.1% at the end of June 2024. But even after this increase, the current level still reflects close to full employment in the economy.⁴

Inflation (as measured by the 12-month percent in the CPI-U) was +3.3% in May. Although this level remains above the Fed’s 2% long-term target, it represents significant progress from the 6%+ inflation readings we saw as recently as early 2023.⁵ However, we believe the path from 3% inflation to the 2% target may take longer than many expect.

As of the time of this writing, futures markets were predicting a 77% chance of a rate cut of at least 25 basis points (0.25%) by the September 18, 2024 Fed meeting.⁶ While we believe this may prove optimistic, we are encouraged by continued job growth and moderating inflation.

Spotlight on International Stocks

By Ed Baldrige, CFP®, Principal & Wealth Manager

During the second quarter, international stocks continued to lag U.S. equities as developed international markets, as represented by the MSCI ACWI ex U.S. Index, added 5.69% while emerging markets, as represented by the MSCI Emerging Markets Index, were up 7.49%.⁷ International stocks’ share of the value of world markets has fallen to 36% as the U.S. market continues to increase in market value. This is a major turnaround from the financial crisis of 2008 when international stocks made up more than 60% of the world’s markets.⁸

Should investors consider this a worrisome sign or an opportunity to add to international stocks? It’s hard to say. But the U.S. dominance over the past sixteen years is largely due to the growth and profitability of American companies’ earnings per share which have grown by 162% since March of 2008 compared to ex U.S. global markets where earnings have dropped by 2% in dollar terms over the same period.8 Another major factor is the strength of the U.S. dollar during that stretch which also favored U.S. stocks. For example, this year through June 30, 2024 the MSCI All-Cap World ex-US index is higher by about 6% in dollar terms vs. 11% in local currency terms, much closer to the U.S. returns (S & P 500 index) of 15% year to date.⁹

Will the U.S. continue to dominate? The world is a big place full of innovative people, dynamic companies and changing demographics. Keeping a global perspective has rewarded investors over the years. One thing we know for certain is that markets change and being positioned to capture returns wherever they may occur is a smart investment strategy.

AI, Technology and the New, New Thing

By George Padula, CFP®, CFA®, Co-Chief Investment Officer, Principal & Wealth Manager

Many of the world’s top companies are focused on technology, prompting some investors to question why they should own anything else. A few months ago, we wrote that Artificial Intelligence (AI) is everywhere, like the air we breathe. I’ll switch and say that AI is like an iceberg in which the headlines capture only a small portion of AI’s impact beneath the surface.

For example, utilities have the infrastructure to support the massive energy requirements of AI.

Further, energy companies are using AI to boost operational efficiencies, fine tune production, automate drilling, and even reduce carbon emissions.

In finance, banks and insurers use AI to analyze customer trends, run risk models and monitor regulatory requirements. Moreover, AI has a critical role in combatting money laundering and financial fraud.

AI in healthcare is transformative. Who wouldn’t want AI to help improve the diagnosis and treatment of life-threatening illnesses like cancer, stroke, diabetes, and heart disease? When expertly applied by experienced medical professionals, AI promises significant societal gains.

The widespread adoption of AI will require substantial infrastructure, including data center construction, new equipment, efficient cooling systems, and enhanced power generation capabilities. Cost efficiencies will improve as AI matures and develops. Through it all, the realities of investment math loom. Just as with icebergs, what’s underneath-valuations, cash flows, profits, quality of credit and earnings-are crucial for sustainable investment success.

Quality portfolios also require rebalancing, tax efficiency, and alignment with long-term planning goals. It also means diversifying globally and across multiple economic sectors. Since AI extends far beyond the tech sector, permeating nearly every industry, why not invest broadly?

50 Ways to Gain Exposure

By Sarah DerGarabedian, CFA®, Director of Investment Management, Principal

To the tune of Paul Simon’s 1975 hit “50 Ways to Leave your Lover”

“The problem is all inside your head”
She said to me
“The answer is easy if you
Take it logically
I’d like to help you in your struggle
So you see
There must be 50 ways
To gain exposure”

“It seems you want AI, EV, and crypto, too
Nvidia, Apple, Tesla
Microsoft and GOOG
But I’ll repeat myself
At the risk of being rude
There must be 50 ways
To gain exposure
Fifty ways to gain exposure”

Just buy an ETF, Jeff
You don’t need a new plan, Jan
It’s all in the fund, son
Just listen to me
Put down the phone, Joan
You don’t need a margin loan
Just leave it to me, Lee
And set yourself free

“You’re worried that inflation’s
Rising every day
I wish there was something I could say
To help you see that you’re OK”
I said, “I appreciate that
And would you please explain
About the 50 ways?”

She said, “if you have stocks
And bonds that they call TIPs
Your portfolio is positioned
To slip inflation’s grip”
And then she smiled at me
And I realized I don’t need to flip
There must be 50 ways
To gain exposure
Fifty ways to gain exposure

Just buy an ETF, Jeff
You don’t need a new plan, Jan
It’s all in the fund, son
Just listen to me
Put down the phone, Joan
You don’t need a margin loan
Just leave it to me, Lee
And set yourself free!”

On behalf of Modera’s investment team, thank you for your continued trust and confidence in Modera. We appreciate your relationship with all of us. If you have any questions or comments, please contact your advisor who can pass them along to our team.

Sincerely,
Bill, Ed, George, and Sarah