Welcome to another episode of Ethel’s Diamond Post,” A segment where we provide updates and insights on the financial market and investment strategies. As we reminisce on our recent celebration of the 4th of July weekend and the end of the second quarter of 2024, we are reminded of the importance of the birth of American Independence. We enjoyed the Federal Holiday with fireworks, parades, and concerts with family and friends. This celebration united us all in unity and patriotism. Whether arriving by trains, planes, or automobiles, we traveled to domestic and international destinations to indulge in hot dogs, hamburgers, and barbecues, honoring our daily freedom and liberties. The American flag, a powerful representation of our unity, and the musical anthem, The Star-Spangled Banner, are the two most symbolic holiday markers that stir a deep sense of unity and patriotism, reminding us of the shared humanity that transcends our external differences.
Despite the challenges faced by Wall Street, the market is brimming with potential, mainly due to the transformative influence of artificial intelligence (AI). The S&P 500 surged 4% in the second quarter, driven by semiconductor stocks and mega-cap technology companies. Stocks have been rising, setting a series of record highs and extending the S&P 500’s year-to-date gain to around 17 percent. These promising returns are underpinned by significant gains for mega caps tech names, improving corporate earnings, and a bet on an autumn Fed rate cut. AI, often perceived as a fleeting trend, is proving to be a game-changer, as evidenced by its role in Nvidia’s (NVDA) 36% gain for the quarter and Apple’s (AAPL) recovery from a stagnant previous quarter. This bright outlook for AI should inspire a sense of hope and excitement about the limitless possibilities of this new technology, instilling a sense of optimism in the market’s future.
The S&P 500, a key indicator of the US stock market’s health, performed well in the second quarter, primarily due to a small number of the largest-cap stocks. Only three of the 11 sectors outperformed or matched the broader index, which could have resulted in a negative performance. However, the top performers, Information Technology (up 13.6%), Communication Services (up 9.1%), and Utilities (up 3.9%), helped maintain a positive outlook. Approximately 25% of the S&P 500 stocks outperformed the index itself, with Nvidia’s shares soaring and briefly making it the world’s most valuable company. Chipmaker Broadcom (AVGO) also saw a significant performance boost as the ongoing build-out of AI infrastructure boosted its quarterly sales.
Utilities, typically a quiet corner of the market favored by income-focused investors, continued to perform similarly to a high-growth sector. At VZD Capital Management, LLC, we observed an increase in volatility as the second quarter grappled with several macroeconomic factors. Investors entered the second quarter with concerns about the inflation outlook. Markets had already adjusted their expectations to three Fed rate cuts from five at the start of the year. As we monitored the economy’s overall well-being, about 60% of the S&P 500 companies ended the quarter in the red. The equilibrium between the S&P 500 advance-decline line, a representation between shares rising and falling, began to slide, which was a sign of potential trouble ahead, a concern we highlighted in our last newsletter.
Most media channels have been on a “monogamous” cycle of President Joe Biden’s age as we approach the US election season. The “Do-It-Yourself” and “Validators” investors are concerned about their portfolios and how they will fare under a Democratic or Republican administration. Perceptions, emotional turmoil, and anger surrounding political parties can overshadow prudent investment strategies due to personal feelings for the candidates. First and foremost, the election is one of many factors influencing the capital markets; other factors are much more substantial than the presidential candidates. For example, macroeconomic factors such as interest rates, inflationary levels, employment numbers, consumer price indexes, policy changes, and wars have a more significant impact than those residing in the White House. While politics and policies can impact the stock market, business profitability is the most crucial factor to consider. Increased demand for goods and services boosted company profits and stock prices. It is essential to keep these factors in mind when formulating investment strategies. This reiterates the importance of considering business profitability when creating, rebalancing, or profit-taking from certain companies and sectors.
It is a common misconception that past performance indicates future results, especially regarding political parties and market performance. We don’t attempt to time the market around an election or outcomes surrounding a political party. What’s more important is a diversified portfolio, which includes a mix of different asset classes and investments. This diversity is crucial in creating and sustaining long-term wealth, regardless of who is in the White House or Congress. A diversified portfolio can help reduce risk and volatility and ensure you don’t have “all your eggs in one basket.” This means that if one investment performs poorly, other investments may perform better, helping to balance the overall return. The emphasis on a diversified portfolio should instill a sense of security and confidence in your long-term wealth creation, especially in times of political uncertainty.
VZD is committed to risk-managed strategies that can change to meet the challenge of evolving market conditions rather than simply buy-and-hold strategies. Market environments change, and so do the strategies that flourish in them. However, we must note that we believe in a diversified portfolio that helps our clients build, maintain, and preserve long-term wealth rather than trying to time the market around the ever-changing environment. When significant events such as an election take place, they don’t necessarily trigger market changes. Instead, how investors react to the big news and their actions ( or don’t take) can set a sea of change in motion. Our adaptive strategies and commitment to long-term wealth preservation should instill confidence in our clients.
Despite having to navigate recession fears, elevated valuations, and higher for longer interest rates, the course may get more challenging as we continue to move forward. The equity market may encounter more volatility in the months ahead, particularly as growth slows, earnings enter a more difficult environment, and the Presidential election nears. While facing some near-term uncertainty, we remain optimistic in the long term. With the potential Fed rate cut and lower rates on the horizon, the equity market should keep climbing. Performance should expand beyond the technology sector, including industrials, energy, health care, and utilities. With less than five months until the election, the Presidential race remains too close to call. Expect volatility to pick up over the summer and early fall as the election draws near. We monitor trade, immigration, and tax policy, which could have market implications depending on the election outcome.
VZD Capital Management, LLC has invested in fixed-income exchange-traded funds, which offer 3 to 6 percent yields depending on the duration, credit rating, and liquidity. Since the last Fed hike, stocks and bonds have posted positive returns. Unlike certificates of deposits, exchange-traded fixed-income instruments are liquid, and the client is not locked into a particular time horizon. Overall, fixed-income yields suggest valuations are roughly aligned with long-term averages and better than the past decade of low yields. High-yield bonds have become an increasingly popular investment choice, and we firmly believe this asset class is positioned to continue delivering the strong performance seen in the first half of 2024. Capital markets classify high-yield bonds as “the least risky asset” because they have historically delivered equity-like returns without volatility over the entire market cycle.
In addition to their capacity as a yield-producing mainstay, high-yield bonds can help investors optimize portfolio diversification, given their resilience during periods of equity decline. Today’s high-yield market offers higher credit quality than a decade ago, a consequence of the improved fundamentals, which further support the case for a lower expectation of defaults vs historical averages.
We appreciate the prompt turnaround of the 2024 compliance renewal forms to our office. If you haven’t returned the form, you will get a reminder letter in the coming days. The information is crucial in our due diligence standards to meet the requirements set forth by the Securities and Exchange Commission and the State Securities Commissioner. If you have any questions or concerns, please do not hesitate to contact Ethel directly at (816) 726-7066 or email to thel@vzdcap.com.
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We appreciate and value your continued support and patronage with VZD Capital Management, LLC. If you know of other people who might benefit from our services, please provide a referral to our growing family.
With Gratitude,
Ethel, Nikisha, and Nathan
Ethel, Nikisha, and Nathan
Since writing this newsletter, we witnessed the assassination attempt on Former President Donald Trump and the innocent people attending the Republican political rally. Such violent behavior should never happen in the United States of America.
While everyone is entitled to their opinions, values, and principles, we do not endorse this type of heinous act that killed and injured innocent people. VZD Capital Management, LLC sends our prayers and positive thoughts to the impacted people, family, and friends.
We all need to unite and pray that we can come together – no matter our differences. Politics does not make “America” great. We, the people of the United States, stand together and unite for our country’s overall health and democracy. Let’s all do our part to stop the violence and hatred and bring peace back to our country through individual and collective efforts.
Thank you again for your continued support and patronage. Please stay well and keep each other lifted for the good of the cause.