Investment
Commentary

Q2 Market Update with Steve Cavalieri

Hello, Steve Cavalieri here, Chief Investment Officer at Summit Financial Strategies. For years, I’ve been crafting amazing written market commentary for Summit clients, but sometimes the best conversations happen face-to-face. Or face-to-camera. Either way, we are trying a new format here, so thank you for checking it out today. 

Now, I’ve been in investments long enough to know that investment talk can make some people feel a little drowsy. Luckily for you, I’ve had enough coffee for the both of us, and I love helping people navigate financial markets. I promise to keep this clear, concise, and maybe even a little fun. 

So let’s dive into what’s been happening in the markets this year. Well, to some degree, it is the same story as the last year and the year before – inflation and interest rates. Recall the start of the year when the Fed Funds futures market was pricing in 6 to 7 rate cuts. The Fed at that time was signaling 3 cuts for the year. Due to stickier than expected inflation, the market has adjusted expectations down to two cuts, a more restrictive stance than the Fed itself.  So, wouldn’t a shift to lower rate cut expectations lead to a market correction? That is like the market realizing the Fed is leaving its foot off the gas pedal of the economic engine. 

Traditionally, I would expect the market adjusting to more restrictive policy like this would involve a selloff in stocks. Higher interest rates create a higher cost of doing business and higher cost of expanding business. What we’re seeing though is quite the opposite. Stocks are exhibiting risk-on behaviors, with large cap domestic, mid cap, and developed international stocks are all at or near all-time highs. And it’s not just a tech rally anymore. Sector participation has grown, with 8 of 11 S&P 500 sectors at or near 52-week highs, and 5 of 11 sectors at or near all-time highs. 

The stock market is probably the best known leading economic indicator, but it is not the only one. To get a better sense of the overall economy, I like to look at the Leading Economic Indicator (LEI) Index, which is a composite of 10 leading indicators. This includes data points related unemployment, home building, interest rates, and sentiment amongst others.  I like the LEI index because it has signaled (predicted) every US recession since 1970. This index first signaled a recession in Summer of ’22 and stopped flashing the recession indicator as of February ‘24. The most recent release proclaimed although there is no long a recession call, softer economic conditions and serious headwinds to growth lay ahead. 

So, what does this all mean? Well, it is important to keep in mind the economy and investments are related to each other but independent. Trying to time investments has been shown to be hazardous to your wealth. Time in the markets trumps timing the markets. With a long-term horizon, keeping cash on the sidelines can have a real opportunity cost. As always, your Summit team remains ready to answer any of your questions. Thanks for joining me today, and I’ll see you on the next one.