We know the summer season comes with some heat waves, but the market experienced its own heat wave in the second quarter, propelling the S&P 500 to new all-time highs. As the summer heat intensified, some of the biggest talking points of the last quarter included:
1. High Inflation & The Fed
2. Tech & AI Investments
3. Upcoming Election
High Inflation & The Fed: Scorching Pressures
Like the temperature, inflation remained high throughout most of the second quarter, leading the Fed to keep rates unchanged in the range of 5.25%- 5.5% — the highest level that we have seen in years. Despite sweltering inflationary pressures, investors maintain confident that the Fed will eventually lower interest rates in September, especially following a June CPI print that showed inflation growing at its slowest pace since early 2021. Undeterred by sticky inflation and slowing growth, the consensus among economists is that U.S. investors and consumers alike can temper any recession fears for the remainder of the year.
Tech & AI Investments: Blazing the Indexes
Reflecting on the mid-summer heat, large, tech-centric companies with a significant influence in the AI phenomenon, such as NVIDIA (+36.7%) and Google (+ 20.8%), continued to be notable performers in the market this quarter, while the top 10% of stocks have grown to represent 75% of all U.S. market capitalization. In addition, investors’ apparent preference for mega-cap stocks can be highlighted by the market-cap weighted S&P 500’s (+4.3%) quarterly outperformance over the small cap index Russell 2000 (-3.3%). As their performance continues a remarkably positive trajectory, questions have begun to arise about whether their valuations will become too hot to handle, and if their high concentration in the market will raise concerns about potential volatility, much like the unpredictability of a breeze on a sunny day.
Upcoming Election: Political Heat Wave
Alongside the rising temperatures, the political climate is heating up with an upcoming presidential election. What does this mean for the market? While an election may create uncertainty and volatility in the market, historically, markets have always settled following an election. However, it is crucial to consider that potential policy changes might impact different sectors. Take the previously mentioned technology and AI stocks for instance; potential policy changes in regulation could significantly affect their concentration in the market. Staying informed and adaptable will be the key to weathering potential market fluctuations.
Staying Hot or Cooling Down?
We remain cautious of potential risks in the upcoming quarter and will promptly rebalance portfolios if key indicators turn negative. In the face of increased volatility, slow growth, and an upcoming election, we are aware of the possibility of the market “cooling down.”
Our Outlook: Neutral, but cautious
Per our all-seasons approach, we continuously forecast the pace of growth and inflation. In the third quarter, we project inflation to ease slightly and economic growth to slow, driving our investment process into the Winter season. Combined with the risks highlighted herein, we remain cautious and reaffirm our efforts of principal protection and sidestepping volatility.
How We Can Help
At GGM, aligning your investments with the prevailing economic environment is just one of the ways we strive to add value to your portfolio. If you are concerned about whether your investments are primed for the current market and allocated to meet your objectives, we recommend our complimentary portfolio checkup. Contact us today!
