Q3-2024-Newsletter

Newsletter & Market Outlook for Q3 2024

July 1st, 2024

All Atlas Clients –

Welcome to the heart (and heat) of the summer.  Kids are out of school, temperature and humidity (depending on where you are located) are rising and the markets have been very narrow in its move.  Meaning, the top 4 stocks in the S&P 500 index have been responsible for more than 35%+ of the S&P 500 index’s move and more than 60% of the profits in the first half of 2024.  But headlines drive emotions and unfortunately, investment decisions.  This commentary will cover and review what is going on in the markets and what to look for in the 2nd half of 2024.

Last newsletter we spoke about good Benchmarks to compare your portfolio or accounts to that would be a more accurate barometer for performance and your risk tolerance.  It is important to know where you should be on the Risk Tolerance scale as that will help determine future volatility in your portfolio performance.  For example, we know the average client and investor does not log into their accounts to see their balances every day (nor should they).  They shouldn’t do this even weekly.  Once or twice per month should be enough to keep you up to date on your accounts.  But are you reading market and economic news on a frequent basis?  Are you understanding what is going on geo-politically and the implications for our markets and your portfolio?  The answer is probably no.  If we were to guess (but an educated guess), we would assume people will read (typically just the headlines) market and economic news along with geo-political happenings about 1 or 2 times per month.  We aren’t saying that is not enough or just enough, but you need to know what is going on and the implications.  Over the last few years, we have asked our clients about their thoughts on the economy, geo-political events and how they make them feel.  Most people are telling us it has zero impact.  Drilling down further the typical response was, “I go on with my life and if I worried about all that, I couldn’t enjoy the life I’ve built”.  That is a terrific response and nothing wrong with it because your family and personal well-being are paramount to any positive life experience.  The second response is, “Ron, I read your newsletter every quarter and when we talk, you update me on all that”.  I will take that as a compliment, but ultimately, our economy and markets along with geo-political events will dictate your future happiness and quite surprising more people don’t keep up or understand these important areas that surround their lives.  Perhaps I’m wrong in my assumption, but ultimately happiness as often as possible is the end goal.

Things to consider about the overall market:

  • Over the last year (1 year), about 17% (85 or so companies) of the S&P 500 stocks outperformed the index.
  • The Russell 2000 (Small Cap stocks) are flat for 2024.
  • Over the last 45 years we have been at the highest levels where the Top 10 Stocks in the S&P 500 as a percentage of the overall market cap, approximately 28%. By contrast, in 1999 during Dot Com mania, the Top 10 Stocks only represented about 27% over the overall market cap by percentage.
  • Momentum and Broad-based market moves: While the market is at/near all-time highs, more than 50% of the S&P 500 stocks are under their 50 Day Moving Average(MA). Meaning, most S&P 500 index stocks are not contributing to any upside momentum so far this year.

As you have read many times in our prior quarterly newsletters, the 10-Year Treasury Note is the North Star of the market.  Certainly not a 100% accurate indicator but has shown a lot of truth when there is volatility in its fluctuating rate.  Meaning, when the 10-Year rate goes up, the markets will struggle and either go sideways, but typically down. When the 10-Year rate goes down, the markets will typically go up.  As we have seen for the last 6 months, an argument can be made for the last 18 months, the 10-Year rate has been a leading indicator of the markets directional move.  Many experts we follow believe the 10-Year rate will go towards and above the 5%+ levels again, then we should see a pullback of 10% or greater in a relatively short period of time.  We are overdue for a 10% correction as that typically happens about once per year and a 5% correction happens 2-3 times per year.  We have already had one 5%+ correction in April 2024.  Remember without normal corrections like this, the precipitous move to the downside in the correction is quicker and deeper when the market is on a heater to the upside.

What to Expect in the 2nd Half of 2024?

Based upon our last paragraph expect volatility to kick-in starting in July through October for a variety of factors;

  • Q2 2024 Earnings were better than expected and lots of cash flowed into the market, specifically to the top 5 stocks. We are looking for fund managers and private equity along with venture capital to lock in profits and preserve their performance for June (end of month, end of quarter and end of first half of 2024).  Net result: Selling or trimming high profitable positions will be imminent.
  • We aren’t wishing for it (of course), but one of the following geo-political hot spots may come to a head before end of 2024; Russia-Ukraine, Israel-Gaza/Hamas/Hezbollah/Syria and China-Taiwan. The last one may happen in 2025 or 2026 depending on our November election results.
    • The one we didn’t add above was North Korea’s involvement with Russia, China and Iran and those potential implications.
  • If the 10-Year Interest Rate reaches or breaches the 5% level and there are more issues with the banks that are trying to hedge their risk. This may impact more of the regional banks and certainly the ones that are holding commercial paper and cannot unload the unprofitable loans.  Hence the hedging of risk to their loan portfolios.  This originally started in early 2023, but many bank experts believe this will start more dominos to fall if they cannot re-position their risk appropriately.  Many experts believe 2025 and 2026 are critical time frames.
  • Possible 10%-15% pullback in the market between July and late September/October timeframe as the Political Season temperature reaches a fever pitch. The market will get pushed around by “headline risk” which typically means nothing long-term but has a short-term impact on our markets.
  • Post November 2024 Election, we are looking for a 5%-10%+ upside from Election Day to end of 2024 and a possible 10%-15% upside for the calendar year 2025. Much of this will depend on the election results but be cognizant of the economy running too hot if they begin to lower the Fed Rate (in late 2024 or 1st half of 2025) .50bps or more and the institutions front-running the rate cut, the pull backs and volatility will be more frequent and deeper.
  • Currency Risk. You haven’t heard me bring this up in previous newsletters, but the largest holders of our debt (Treasuries) have been selling a healthy percentage of their positions.  Japan is especially worrisome as their currency (Yen) is at a 38 year low against the dollar.  This not only will impact Japan’s economy but will hurt any exports to their country.

The last area of concern is geo-political events.  We can state this in every newsletter until the end of time as it will always be a concern.  But the three big hot spots in the world have been giving a lot of pause to ponder the world economy and impact not if, but when things escalate.  Germany is a good barometer of economic health in Europe as they are typically the most productive society focused on business growth, they are nearing a recession (if not already in one).  We saw during COVID how the supply chain affected our economy and along with the printing of almost endless money by both administrations.  The effect, inflation soared and is still impacting everyone’s wallets today.  Even if food and service prices came down 10%-20% (which it probably won’t), people must budget differently.  They aren’t just buying staple items, most of their spending is discretionary (meaning spending on nice’s and vices, goods and services).  Good for the economy, but bad for savings when the economy contracts.  Credit Cards and Banks have been reducing or not extending credit lines to consumers.  Carry over Credit Card monthly balances breached the $1.1T level earlier this year (at an average of 21.6%).  Does that mean the music is slowing down and people need to figure out if there is an open seat when the music stops?  Tough to analyze and determine time frame, but it will come to a head at some point.

In Summary

Remember, we always preach the following: “Financial Health is good for your Mental and Physical Health”.  Without knowing what’s ahead for us with the economy, election and geo-political politics it is important that you have savings, reduce debt (especially Credit Card debt) and put it away for retirement.  Budgeting is critical, but don’t limit your life.  We all need time to reboot from the daily grind.  I have found even retirees that aren’t working but keeping busy seem more stressed, that needs to change.  Some of them have told me they are worried about their kids and grandkids and that is what is keeping them up at night and crushing on their thoughts frequently.  This newsletter isn’t supposed to be a written soliloquy, but I’m sure you can relate to the core message.

As always, please reach out to share your thoughts.  Be safe and healthy!

With Best Wishes,

Ronald E. Lang, Principal and Chief Investment Officer

Atlas Wealth Management, LLC

REMINDER:

I participate in a frequent Podcast called, “The Cents of Things” with an Advisor friend of mine and you can access that library of episodes when you available time.  This is available on YouTube and you can also access this from our home page.  We try to keep the conversation light with a bit of Pop Culture and some economic and market thoughts on what is going on now and how we see things panning out in the short and long-term.  Many colleagues of mine have podcasts and we will continue to participate in these episodes and post other video’s on the markets and economy throughout 2024.  We do have a YouTube Channel that you can access and “Subscribe” too called, “Atlas Builds Wealth” channel.

We have posted our two Webinars from September 2023; you can access this from our home page also.  These are “on-demand” video’s and you can watch them whenever it is convenient for you.  They have been edited for time and you can certainly share them with friends, family and colleagues.