Since the SP500 peaked on July 16, 2024, the character of the stock and bond markets has changed. The underlying economic trends are positive. Inflation, the focus of many economists and political campaigns, is slowing and appears to be improving as supply and demand factors are heading for equilibrium. Economic growth is still expanding with the first reading of the second quarter GDP (Gross Domestic Product) increasing by 2.9%. Thus, economists estimate growth of 2.3% for 2024 and 1.7% for 2025, according to Bloomberg data. These estimates are in line with the long-term trend of 2% growth. Corporate earnings are showing a positive economic backdrop. For companies that have reported 2nd quarter results, the average profit growth is 12%, higher than 8% projected by analysts approximately a month ago.
With inflation moderating, bond yields have dropped sharply. The 2-Year Treasury Bond yield has dropped from 4.6% in early July to yesterday’s low at 3.65%. The 10-Year Treasury Bond yield also fell sharply to 3.7%. Until recently, lower bond yields motivated investors to shift their portfolios in stocks from the mega large companies (Apple, Microsoft, Nvidia, Meta, and Google) into smaller companies who have not performed well in years. It appeared that investors were selling winners and buying losers without regard for analyzing a company.
After peaking on July 16th, the SP500 has trended lower; yesterday morning stocks opened sharply lowered in a panic selloff dropping by 4.3% from Friday’s close before bargain hunters including, Andrew Hill Investment Advisors, Inc. began taking advantage of the emotional selloff. While there are other factors at work, the Japanese “carry trade” reversal maybe the culprit. For years, large investors would borrow funds in Japan because their interest rates were near 0% and invest in equities especially the U.S. market. This investor tends to focus on the biggest companies and the growth in technology led them to many of the favorites including top holdings in client portfolios. What led to the huge drop Monday morning was the 12% drop in the Nikkei, Japan’s largest stock market index. Selling flowed throughout the world and into the U.S. markets leading to about a 3% drop. Fortunately, today, investors are seeking bargains and the SP500 has recovered a good portion of yesterday’s losses.
In client accounts, we have been active over the past month attempting to reposition portfolios for the changing circumstances. We have built positions in several new companies while eliminating positions that were not working and making profits in some technology companies such as Nvidia which had been reduced by about 50% until we added back a few shares yesterday morning. One theme we are focused on is the electrification emerging growth. With data centers driving artificial intelligence, the demand for electricity is a new growth business. In addition, other factors are also increasing the demand for electricity including record hot temperatures, re-shoring of industrial businesses to the U.S., electric vehicles, and the general growth of the population. Recently, we have purchased additional shares of Constellation Energy, the largest nuclear power producer and American Superconductor, our only material position is a small cap holding that is providing products for improving the energy grid domestically and globally.
While we do not expect the emotional chaos in the stock market to disappear immediately, keep in mind how we manage client portfolios. Most client portfolios have really two portfolios; a fixed income portfolio positioned in laddered high-grade bonds that provides funds needed from the portfolio over the next 5 to 7 years, and the equity portfolio which is for the long-term growth beyond 7 years. When clients keep our strategy in mind, their psychology shifts from fear to interest in buying the bargains since they have a long-term horizon.
OUR TEAM
Andrew “Andy”
D. W. Hill, CFA
President and
Co-Founder
Jennifer R.
Figurelli, CTFA
Managing Director
and Co-Founder
Elicha D.
Moore
Client Concierge
Representative
Sean
O'Brien
Associate
Portfolio Manager
