Q3 2024 Quarterly Market Update

Market Update Q3 2024

Hi everyone, good afternoon, this is Zach Harrington from Rise Advisors. On behalf of my partners Mark, Scott, and Stephanie as well as our staff, Abby, Jenna, Danielle, and Angelica, I'd like to thank you for taking the time to watch our market outlook for what will be the third quarter of 2024. As we sit here in July of 2024. It's been a really interesting year in markets a lot of what we talked about during the last quarter, which was, you know, market outperformance following the peak of CD rates has panned out. And we want to spend a lot of time kind of talking about what's next.

So we talked about last quarter how equity markets and bond performance - post the peaking of interest rates -  have a really good 12-month period. We're experiencing that right now. But it's starting to think beyond that period as we go into the fall and the back half of the year. We're going to spend some, a lot of time talking about the stock market itself, some dichotomy between Main Street and Wall Street. A really interesting chart that I think illustrates kind of the labor market, where it stands today and how a lot of like normal middle class Americans are feeling right now. A little bit more on that history following peak rates and what to expect next. And then just some general portfolio considerations that I think are timely as we sit here on what is Wednesday, July 10th in an S&P 500 at, you know, record highs of about 5,600.

 So, this is a chart that's a one-year chart. This goes back from July 9th, 2023 to July 9th, 2024. And what's really important to look at here is the run that the S&P 500 has been on, traditionally speaking markets contract in a given year, you know, anywhere from 10 to 14% and we haven't really seen that in the last 12 months. We had a bit of a correction here to end the, the third quarter. But from basically Halloween onward, things have been really, really good in equity markets. I think it's important to keep in mind that this behavior normally doesn't continue and you should expect some volatility in the back half of the year.

What you're looking at here is a chart that goes back basically the last 25 years. You'll see there's this line chart up top. That line chart represents the calendar year return for the S&P 500. So you can see in most of those years the market was positive pretty significantly. The biggest thing to keep in mind here is the red bar chart. And what the red bar chart represents is that maximum entry year decline, meaning if you look at a year like 2012 where the market's up almost 30%, the market also at one point in the year was down six percent.

If you look at 2020 where the market closed up 22% at one point during the year, it was down 34%. So, markets tend to move dramatically and it's not uncommon to see a high single digit, low double digit contraction in a given year. I just want to make sure that we're level setting expectations where we've been on this run for, you know, the better part of 12 months now of a really positive stock market. Specifically, when you look at Large Cap US, we haven't had the volatility. I would fully expect it to come as we come into the third and fourth quarters here.

Now let's talk about what has led to a lot of that growth that we've experienced. A lot of it is concentration. So we've talked about this ad nauseum in client meetings. We've talked about it a ton on these videos throughout the last year and a half or so. But the market is incredibly concentrated. And with that, what we're saying is that the top 10 companies in the market as measured by market cap, so think Nvidia, Apple, Microsoft, Google/Alphabet, Meta, Berkshire Hathaway, you know these big, big companies, they now make up 35% of the market cap of the index. So that means that those 10 represent more than one third of the index, the other 490 companies are nowhere near the same size and scope. Why that's important is we're seeing record high bullishness so that this blue line shows that concentration of those top 10 companies, but the green line shows those companies share of earnings. And so normally these tend to move in log step when they expand out. It does tend to be a bit of a bubbly and frothy period in the markets. The last time we saw a spread this wide, was right around the tech bubble, the early two thousands.

And this one's a bit of an anomaly here. This is the start of the pandemic, but it's normally not a great sign when you see this massive spread of market cap relative to earnings expectations. Now those earnings could pick up when you think about those top 10 companies, Tesla had really positive delivery news, NVIDIA's really benefiting from the CHIPS act that was put in place by the Biden administration. Apple is going to have the iPhone 16 rollout here in a couple of months, which is expected to be absolutely huge when it comes to rolling AI into handheld devices. So could earnings pick up and justify those valuations? Absolutely. But if the earnings don't pick up, you are starting to get into a pretty vulnerable market, which is something we'll continue to pay attention to.

One of the things we think is super important too, to keep in mind is a lot of times people focus on the S&P 500 and the key there is the number 500. Those are the 500 largest companies that make up the index. But what's really important to keep in mind is the main street versus Wall Street dichotomy. A lot of you don't work for S&P 500 indexed companies who employ hundreds and hundreds of thousands of people. Most of us work for small businesses. Rise Advisors is a small business. And what's important to keep in mind is the fact that 2.3 million businesses employ at least five people. And so when we look at the impact of the Fed's interest rate policy, it does not have a ton of impact on the S&P 500 for the most part. Why is that? Those are incredibly large companies with very sophisticated balance sheets who have access to credit facilities that average people don't have.

When you look at the fact that there are 20,000 businesses that employ five to nine people, another half a million that employ 10 to 19, another 650,000 that employ up to a hundred, and then a million businesses that are somewhere between 100 to 105 hundred employees. These are businesses that are really important to local economies that have had a really tough time when it comes to managing these interest rate environments, which is why I think something has to give here.

The other thing that's really important is the Fed has this kind of dual mandate. They've continue to talk about driving down inflation while maintaining a strong labor market. And I think that's a bit of a fugazi like I don't think it's really a real thing. And when we talk to clients every day and when you talk to everyday people in your life, a lot of Americans right now are, you know, their lease is coming due on a car that they leased early on in the pandemic and their payments are 40 and 50% higher than where they were. Mortgages are through the roof; rent is through the roof. You know, the cost of living is still very high. And it's important to keep in mind that inflation coming down does not mean deflation.

So, inflation coming down just means the rate of price increases is getting less. So when I look at the labor market, I don't view it as strong as the Federal Reserve does. And so this chart goes back to the start of the pandemic, February of 2020. The Green line is for native born US labor participants and the blue line is for foreign borne US labor participants. And so when you look at the growth in the labor market over these last four plus years, it is almost entirely driven by immigration. The labor market for natural native born US citizens is flat to somewhat negative. And the 12% growth we've seen in the labor market over these last four plus years is almost exclusively from immigration.

And so I think that's really important. I think it's a part that gets lost here is we're at this weird influx in the market and in our interest rate environment where rates are high, it's really impacting middle class Americans. Middle class Americans are having a tough time with, you know, layoffs at their existing job trying to decide if it's worth jumping ship or not, and the risks that come with that. And they keep hearing on the news how the Federal Reserve is very proud of the labor market and all of these things. And I just don't think it's, it's a real impact. So I do think something has to give here.

Now, with that in mind, it's important to keep in mind that when we look at a rising interest rate environment, what the Federal Reserve is doing, and we've talked about this also ad nauseum over the last couple of years, is their raising rates to make access to money more expensive and to slow down economic activity. And so traditionally, when they get to the peak of their rate hiking cycle, normally when they maintain those high rates, money remains so restrictive that the economy contracts. So if we go back and look at the 2008 recession, it was 18 months from the last rate hike to when the recession began. In 2001 it was 10 months. The recession of the early nineties was 17 months. And in some other cases, you know, throughout the other decades it was the peak of rates is what led to the recession. So I think it's really important to keep in mind that when you look at the labor market, when you look at the impact on middle class Americans, when you look at Main Street versus Wall Street, it's really important to keep in mind that a recession's not off the table right now. The Fed's done a really good job of navigating things so far, but if they don't start to pivot here soon, it could get intense for mainly equity markets. And that I think is the biggest thing for us to focus on.

If you go back to the portfolio sell offs, most of us experienced at the end of 2021 and throughout 2022, it's a very different market environment. Right now we're dealing with a market where you have high interest rates and you have expanded equity multiples. Back then you had zero interest rates and expanded equity multiples. And so you had growth selling off as rates were coming up. And it's a nightmare scenario. right now we don't have to deal with that. If we enter a recession at some point in 2024 or 2025, it's not the end of the world. And I think that's really important to keep in mind.

 There's been this concept that's been discussed for years and we've seen it play out during the pandemic recession. We saw it play out during 2008. We've seen it play out a couple other times. But as this concept of a “Fed Put”. Meaning that as the economy slows, the Fed lowers interest rates to make money more and more accommodative to help spur economic activity. And so keep in mind as rates come down, bond prices go up. We've done a great job here at Rise over these last 15 to 18 months, adding longer duration bond exposure with the expectation that they just get to normal rates, which we think has tremendous upside like we outlined in our last quarterly update. However, if we get a recession, they have to cut rates to zero. We love the upside in the fixed income space even more.

Some things to keep in mind, most of our clients have exposure to structured notes. We've talked about it at length in meetings with you, and most of those are going to begin to mature here over the next 30 days to six months. I think it's really good timing, let's keep that in mind. We're at the 12 month period since peak rates. There's a chance of some slowdown in economic activity. We're going into an election cycle. It's a really great time to refinance those and reestablish those buffers at these record highs. Really love the structured note exposure. For those of you who may not have them, it's worth having a conversation with your advisor. You know, if you're an overextended equity investor, now could be a really good time to reduce your equity exposure and adding some really high credit quality fixed income and some structured notes.  I think those are the two big things to focus on for investors over the coming 90 to 180 days.

But it's important to remember, these are all things that we've prepared for. I think that your portfolios are very well set up for any sort of uncertainty we might continue to have. I think the base case is the Fed starts to cut rates throughout the fourth quarter. We probably end up avoiding the recession, but I think it's important to keep in mind that a correction in equity markets is probably due.

So with that being said, I want to thank you for taking the time to watch this video. And as always, if you have any questions relative to anything going on in your portfolio or any of the content of this video, I'd be more than happy to sit down with you and have that discussion. Hope you have a great rest of your summer. And on behalf of all of us here at Rise Advisors, thank you so much.

 Disclosure: This presentation is for Informational purposes only. All investment strategies including rebalancing and diversified asset allocation have risk. Past performance of our investment approach, component holdings and methods does not guarantee future results. Advisory services offered through Rise Advisors, LLC ("Rise") Registered Investment Advisor. While all data is believed to be from reliable sources, accuracy and completeness are not guaranteed.

Sources:

1.Yahoo Finance – SPY 1 year chart through 7/9/2024

2. AES International – Fund Analytics, S&P 500 price performance

3. Apollo Global, Torsten Slock S&P 500 concentration 6/30/2024

4. Apollo Global, Torsten Slock 2.3 million private companies employing 5 people or

more 7/2/2024

5. Apollo Global, Torsten Slock Labor Market weak for Americans 6/17/2024

6. Apollo Global, Torsten Slock Recessions post last rate hike 6/21/2024