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c. Within U.S. stocks, large-cap growth continues to outperform driven by impressive earnings growth related to Artificial Intelligence. We think there are opportunities outside of large growth in large-cap value and small cap stocks. Our five-year return estimates have US large cap stocks underperforming Developed International and Emerging Market stocks.
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a. Global Asset Allocation Current:
i. 70% stocks (overweight compared to 55% benchmark)
ii. 10% cash (Underweight compared to 10% benchmark)
iii. 20% bonds (Underweight compared to 35% benchmark)
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b. We still believe that with a favorable central bank influence and macro backdrop, downside risk this year will likely be limited to occasional corrections. A bear market is unlikely unless there is a resurgence in inflation expectations leading to a bond yield breakout or an unexpected economic collapse.
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c. While we raised our year-end S&P 500 target to 5725, stretched valuations, optimistic sentiment and narrowing market breadth makes it susceptible to significant drawdowns if the bullish backdrop weakens.
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d. The bond market outlook for the second half depends heavily on Fed policy. Historically, bond yields peak 2-3 months before the first rate cut. While there are arguments for the Fed to cut rates before the election, we expect they will wait until after, likely in December. The policy remains restrictive.
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Schwab Market Perspective
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a. “K-Shaped recovery” - Certain segments of the economy and stock market have experienced much stronger recoveries this year, underscoring a severe bifurcation between the “haves” and “have nots.”
- Upward trending – High Income Consumers, Services, Large companies, Tech
- Downward trending – Low-Income Consumers, Manufacturing, Small companies, Rate sensitive
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b. Consumer confidence has been dented by the high cost of living, clearly more pronounced down the income spectrum. One way the scourge of inflation has manifested itself is by changing consumer behavior. A recent NielsenIQ study found a significant increase in spending on store brands relative to a shrinking share of spending devoted to national brands.
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c. Since the bull market began in October 2022, a glaring feature has been the dominance of large caps (proxied by the S&P 500) and the lack of meaningful upside for small caps (proxied by the Russell 2000). Large caps have outpaced small caps by nearly 30% over the past 18 months. It’s highly unusual to see small caps lagging in the earlier stages of a bull market, but as we’ve been emphasizing, this is not a normal cycle.
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d. NVIDIA’s surge has brought many comparisons to the tech bubble in the late 1990s, and while the hype around AI is similar, every bubble/mania is different. Worth noting, though, is that even for the largest companies in the late 1990s that saw their share prices plunge when the bubble burst, it wasn’t because their earnings growth went outright negative; they couldn’t continue to meet aggressive expectations. Perhaps that can serve as food for thought, given NVIDIA’s forward earnings estimate is up 253% year-over-year.
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Our Conclusions
- The economy does feel like a “tale of two cities”. The top 20% of the population, while feeling some pinch due to inflation, is enjoying both appreciating assets and income/yield from safe cash/cash equivalents. The bottom 60% of the population is struggling with shelter and grocery bills. The cash pile from stimulus checks is no longer available and tapped out consumers are having to change their purchasing habits, and rely on credit/financing.
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- The AI stock market phenomenon does remind us of the internet bubble days of the late 1990s. High valuations, concentration in “blue-chip tech” companies, unrealistic growth expectations, and the belief that the tech sector would be the only sector that benefited from the internet. We recall working with a tech company that saw its stock drop over 80% despite continuing to deliver earnings growth…
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- Large-cap stocks have held the baton for quite some time. We believe that long-term successful investing requires making uncomfortable investment decisions. While it may seem comfortable to stick with the Microsofts and the Apples, we strongly believe that maintaining exposure to unloved assets (small cap, international, emerging market, and bonds).
If you have questions about your portfolio, please contact us anytime.
This Is Life: "Celebrating Johann's Journey"
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By: Pat Guinet, CIMA®
In our ongoing commitment to share the human side of our work, we're excited to spotlight a truly inspiring story this quarter: Johann's journey. Many of you know Jannette Lacsamana, affectionately known as "Pebbles" on our team. She's not only instrumental in scheduling reviews and reports but also a devoted mother. Recently, Pebbles shared with us the incredible news of Johann's graduation with a Building Construction Technician Diploma on July 17, 2024. With her permission, we dedicate this quarter's "This Is Life" segment to Johann and Pebbles.
Johann's path has been one marked by resilience and remarkable achievements, beginning with his early diagnosis of mild autism at age 3. Despite initial challenges in social interactions, Johann's determination has illuminated every step of his journey.
He completed a rigorous 5-year high school program before embarking on a thoughtful decision to pursue a 2-year trade skills college course. Balancing academics with practical experience, Johann also took on a part-time role at McDonald's, where he not only earned a living but also cultivated a strong work ethic and responsibility in a bustling environment.
When the COVID-19 pandemic disrupted his studies, Johann's adaptability shone through as he transitioned to full-time work in manufacturing, impressing recruiters with his dedication and skills. This experience not only provided stability but also bolstered his confidence in the workplace.
Johann's journey to independence also includes his achievement in obtaining his G2 license in 2022, followed by his full G license, a testament to his commitment to safety and responsibility on the road.
During his college years, Johann discovered a passion for construction during his field placement at Habitat for Humanity. Going beyond the required hours, he immersed himself in building homes and acquiring new skills, demonstrating both his dedication to learning and compassion for others.
Music has been a constant joy in Johann's life, from his early days learning the piano to exploring different instruments and developing an appreciation for classical music. His evolving taste reflects his growth and personal journey.
Now, at 27 years old, Johann's graduation with a Building Construction Technician Diploma is a significant milestone not only for him but also for his family, who have stood by him with unwavering support and pride. Johann's story is a testament to resilience, determination, and the boundless possibilities that lie ahead.
We feel incredibly fortunate to have Pebbles as part of our team. Her dedication and care extend beyond her role at GFP. Johann's successes remind us of the importance of understanding each person's unique journey and the transformative power of perseverance and a supportive parent. Take a moment and look at your family members and appreciate the gifts they bring to “your” world. Fitting in a “box” is boring. Making us have a paradigm shift in our view of the world is a miracle.
Join us in celebrating Johann's achievements and the remarkable individuals who inspire us daily.
Education to Empower You: Legal Documents When Kids Turn 18
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If you or someone you care about has a child who has recently turned 18 or will soon, we wanted to share an important but often overlooked detail amidst the excitement of celebrating their transition to adulthood.
When a child turns 18, parents and guardians lose access to their medical, financial, and academic records. This significant change can catch many by surprise. However, with the appropriate legal documents in place, you can ensure continued access and support for your child in an emergency.
Here are four essential documents to consider:
- Durable Power of Attorney: This allows you to manage your child's financial matters if they cannot do so themselves, ensuring you can pay bills, access bank accounts, and make important financial decisions.
- Medical Power of Attorney: With a medical power of attorney, you can make health care decisions on your child's behalf if they become incapacitated due to illness or injury. It allows you to avoid costly and time-consuming court proceedings in a crisis.
- HIPAA Waiver: By signing a Health Insurance Portability and Accountability Act (HIPAA) waiver, your child gives you access to their medical records and allows you to communicate with their health care providers. This ensures you’re informed and involved in their health care decisions.
- FERPA Waiver (optional): A Family Educational Rights and Privacy Act (FERPA) waiver gives you access to your child's educational records, including grades, test results, and disciplinary actions.
Remember, legal requirements vary by location, so it's essential to research the specific requirements in your state and any state where your child resides or attends college.
If you need clarification or assistance gathering these documents, don't hesitate to reach out. Also, feel free to pass this information along to anyone you know who has a child approaching this milestone birthday.
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