Quarterly Insights

4 Insights for Long-Term Investors in the Second Half of 2024

July 2, 2024

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As we enter the second half of the year, it’s important for long-term investors to maintain perspective on the major events that have driven markets. Despite ongoing economic uncertainty, the stock market has experienced a strong rally as investors anticipate the first Fed rate cut and the rally in artificial intelligence stocks continues. During the first six months of the year, the S&P 500 gained 15.3% with dividends, the Nasdaq 18.6%, and the Dow Jones Industrial Average 4.8%. The 10-year Treasury yield declined from its April peak of 4.7% to 4.4%, allowing the overall bond market to be roughly flat on the year. International stocks have performed better as well, with developed markets generating 5.7% and emerging markets 7.7%.

The market’s focus will now shift toward major events in the second half of the year. Perhaps the most notable is the upcoming presidential election. As investors prepare to cast their ballots in November, they will also wonder what each political party could mean for their portfolios and financial plans. Investors will also watch the timing and number of Fed rate cuts closely since lower rates are generally positive for both stocks and bonds.

While the outcome of these events is uncertain and introduces new risks, history shows that it’s important to separate our personal feelings around politics from our financial decisions in order to stay invested, diversified, and disciplined. Below are four key insights all investors should keep in mind to stay informed through the rest of 2024 and beyond.

1. The market continues to reach new all-time highs

 

On its way to a 15.3% gain in the first half of the year, the S&P 500 has achieved over 30 new all-time highs. While this is positive, it can also make many investors nervous. When the market is in uncharted territory, it’s easy to worry that it may be “due for a pullback.”

The reality is that price swings are an unavoidable part of investing, and the market will certainly pull back at some point. However, the timing of these declines is difficult if not impossible to predict. At the same time, major stock market indices will naturally spend a significant amount of time near record levels during bull markets, as shown in the accompanying chart. Trying to time the market tends to be counterproductive for this reason.

2. With inflation cooling, the Fed is on track to cut rates later this year

 

Investors have been anticipating the first rate cut of the cycle since the beginning of the year. This has not only driven returns but is one reason markets have swung so much when new economic data has caused expectations to shift.

The accompanying chart shows the possible path of the federal funds rate based on the Fed’s latest projections. At its last meeting, the Fed cited strong job gains and low unemployment as indicators of solid economic activity but emphasized that “inflation has eased over the past year but remains elevated.” Fortunately, the latest inflation data in May showed a significant deceleration that has preserved the possibility of a rate cut this year.

3. Many investors remain on the sidelines in cash

 

In times of market uncertainty, investors often seek the safety of cash. This has been true over the past several years as markets have swung due to the pandemic, geopolitical events, Fed rate hikes, inflation, gridlock in Washington, technology trends, and more. Additionally, interest rates on cash are at their highest levels in decades, making it appear that there are attractive “risk-free” returns.

While cash is important, it can become problematic when investors hold too much cash. This is because cash is not truly risk-free. Inflation quietly erodes the purchasing power of cash over time. So even if yields appear to be high, the real value of your money could decline.

4. The presidential election is heating up

Coverage of the presidential election is heating up. While elections are an essential way for Americans to help shape the direction of the country as citizens, voters, and taxpayers, it’s important to vote at the ballot box and not with investment portfolios. History shows that markets can perform well under both major political parties. As the accompanying chart shows, the economy and stock market have grown over decades regardless of who was in the White House. What mattered more across these periods were the ups and downs of the business cycle.

Of course, politics can impact taxes, trade, industrial activity, regulations, and more. However, not only do policy changes tend to be incremental, but also the exact timing and effects are often overestimated. Thus, it’s important to focus less on day-to-day election poll results and more on the long-term economic and market trends.

The bottom line?

Investors should keep these four factors in mind as we head into the second half of the year. As always, it’s important to maintain a long-term perspective to achieve investing goals. We are always here to discuss your personal situation to determine if any changes in your investment plan should be considered. We hope you have a great summer!