Normalizing Uncertainty

June 02, 2024

Welcome to June!  We have had a fantastic year, despite my reservations of the S&P 500 being too hot and inflation being too high.  We are between 12% and 17% this year for the S&P 500 Funds which is on par with other years that resulted in +20-30% returns.  What makes this year different is the higher interest rates, which should drag the stock market down.  

We are seeing the Small Caps suffering from inflation, however.  As I have mentioned in previous posts, the Small Caps are less able to handle the higher interest rate environment as they must accept the interest rates given their basic financial position relative to the lenders.  This in turn increases their interest expense on borrowing and can also increase their COGS as suppliers pass on pricing increases without the ability to resist.  All of this is combining to reduce their expected earnings and future cash flow projections which is directly tied to their stock price.

I think the market in general is fairly stable at this time.  We do have a certain amount of uncertainty in the world, something the market abhors.  However, many of the events causing the uncertainty (e.g., Ukraine, Gaza) have become the status quo, making things more certain in an ironic way.  Additionally, we are in an election year where uncertainty and surprises should reign.  However, I do not think this year will follow that pattern.  Both parties have their candidates, and I think most voters are already decided.  Even the Trump trials seem to be a foregone conclusion with no change in the electorate because of these trials.  I would be cautious as we get closer to November, but for now, I do not see the election as a major source of uncertainty.

I do expect several corrections over the course of the next 6-9 months, it’s just how the market works.  I think the Small Caps will continue to be sluggish until inflation is reduced.  As for the International Funds, I do not see much growth in the international markets as we continue to export our inflation to the other nations of the world-Japan and the falling Yen being a prime example (of course Japan has other issues as well).
For June I’m still positive on the S&P 500 Funds and will be keeping it at 100% for both new contributions and current allocations.  Keep investing!