Our Thoughts on SECOND Quarter 2024

Matt Johnson, CFA® - Andy Nugent, CFA®

2nd Quarter Market Recap, Portfolio Analysis, and Review

The market was a mixed bag in the latest quarter with a lot of conflicting data.  The economy continued to grow, but personal credit card debt is near historic highs.  Company earnings grew, but if we remove the few largest tech and artificial intelligence (AI) companies from the equation, earnings were lower in the quarter.  Unemployment rose slightly but is still very low historically.  Inflation is much lower than it was a couple years ago, but still higher than the goal.  As we move into the second half of the year and towards the US presidential election, the economy continues to focus primarily on inflation, the Fed funds rate, and our growing economy.  Let’s take a closer look at what happened (or didn’t happen) over the past few months.

The Consumer Price Index (CPI) and Personal Consumption Expenditures index (PCE) are widely used to determine the inflation rate.  Inflation, although much lower than in mid-2022, seems to have leveled off and remains just under 3.3%.  The core inflation rate (CPI excluding the highly volatile food and energy) was nearly the same at 3.4%.  One area that has seen a drop in prices over the last year is vehicles, with used cars and trucks down more than 9% over the last 12 months.  However, that is offset by increases in things like shelter, transportation, and piped gas (utility) which were each up over 5% over 12 months.  We are hopeful we will see a further reduction in the rate of inflation later in the year.

Interest Rates

With inflation stalling out in the short-term, it has really tied the Feds hands when it comes to reducing interest rates.  They have remained consistent about not reducing rates until they see a clear path to 2% inflation.  At this point, it is hard to argue we are on a road to 2%.  Therefore, the short-term interest rate remains unchanged and the yield curve continues to be inverted.  This means that short-term bills are paying higher interest rates than long-term bonds.  The spread between the 1-month T-Bill and the 10-year note is narrowing with the rise in the 10-year yield from 4.2% last quarter to nearly 4.4% at the end of the second quarter.  This supports the higher for longer narrative being put out there by some economist. 

One good thing about higher interest rates is money market funds continue to pay more than a 5% yield.  This is a very nice return on a cash investment.  We are using money market funds for our bond proxy since the yields are comparable and investors maintain liquidity by not having money tied up for an extended time.

Home mortgage rates once again remained steady ending the quarter at 7% for a 30-year fixed rate mortgage, per Bankrate. 

Sector Analysis

The S&P 500 was up almost 4% in the quarter. Mega-cap tech and artificial Intelligence (AI) companies continue to pull the market higher due to both large stock price advances and large weightings in the index.  However, the average large cap stock (as measured by the S&P 500 Equal Weight Index) was down 3%.  In fact, six of the eleven sectors had a negative return in the quarter and the Dow Jones Industrial Average was down almost 2%.  We hope to see a broadening of positive returns in the second half of the year with more companies and sectors participating in the rally.

We did quite a bit of trading in the quarter.  We mostly sold or parred back securities that neared or surpassed their sell price, but also added one new position and averaged down in another company. 

Industrials – We lowered our exposure to both General Dynamics and FedEx in the quarter as the prices appreciated towards our assessment of their fair value.

Financials – After parring back Visa in the first quarter, we sold the remainder in this most recent quarter as the stock price no longer justified holding the company. 

Consumer Staples – We added to our weighting here.  J.M. Smuckers had a significant pull back in price that the financials did not warrant in our opinion.  We took the opportunity to add to our existing position.  We also added Hershey Company.  The stock price declined as cocoa prices surged weighing on their operating margin.  As we expect the shortage of cocoa is not long-term and for prices to normalize, we established a new position.  Hershey has a very good balance sheet with growing revenue, earnings, and a long history of increasing dividends. 

Information Technology – We exited our position in Qualcomm as the stock price exceeded our estimate of its true worth.  Since selling, the stock has continued to appreciate, but as a wise man once said, “You’ll never go broke taking a profit”. 

Summary

The market continued its nice run in the second quarter.  Most companies met or beat earnings expectations.  With inflation remaining sticky at these lower levels and the Fed not making changes to the interest rate because of it, the economy remains in a holding pattern.  At the end of the day, company earnings matter.  When we build portfolios, we build them by looking at company specific financials first.  We do not ignore the macroeconomic factors, but they are secondary.  We typically look for quality companies with good earnings and balance sheets.  We build a diversified portfolio across several sectors.  The markets will pull back at some point.  That is OK.  We expect it.  We will use that opportunity to buy other quality companies that are less expensive than they are today.  We remain committed to the process and take a long-term view.  We again thank you for your continued support in allowing us to help you to reach your financial goals.

Matt Johnson, CFA® - Andy Nugent, CFA®

Sage Capital Advisors, LLC is a Securities and Exchange Registered Investment Advisor. Sage Capital Advisors is headquartered in Sioux Falls, South Dakota. Advisory services are only offered to clients or prospective clients where representatives of Sage Capital Advisors are properly licensed or exempt from licensure. This market commentary is solely for informational purposes and should not be construed as investment advice, it is only intended to provide education about the financial industry. Historical performance results for investment indices and/or categories have been provided for general comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of investment management fees, or the impact of taxes, all of which would have the effect of decreasing historical performance results. Indices are unmanaged and cannot be invested in directly. It should not be assumed that your account holdings correspond directly to any comparative indices. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered unless a client service agreement is in place.